Second, you have to care about the fees you pay. Automation enables robo-advisors to manage investments for a fraction of the cost of commissioned or full-service investment advisors like mutual fund companies and wealth managers. So, robo users tend to be thrifty middle-income people who don’t have a vast fortune that might justify higher fees.
At the same time, robo clients may be people without the time, investment knowledge or inclination to manage their portfolio themselves. Do-it-yourself investing, which was made a lot easier with the advent of ETFs, will always be a little bit cheaper. But unlike DIYers, robo users really can “set it and forget it,” and sleep well knowing someone else (or some algorithm) is looking after their nest egg day in, day out.
How do robo-advisors work?
First, you need an account. With pretty much every robo-advisor, the process of setting one up begins with an online questionnaire. This helps the robo to get to know your risk tolerance and what you will use the account for. You might have an interview or a text chat with a live representative. After that, the algorithms get to work, selecting a portfolio for you to invest in. If you like what you see, you transfer money into the account, and away you go. All the providers now offer an app, so you can access your account on your smartphone.
Generally, robo clients don’t have to worry about trading fees—any rebalancing or changes in the portfolio are covered by the portfolio management fee. This fee is in addition to the management expense ratio (MER) charged by the ETFs themselves. Between the robo’s fee and the ETFs’ fees, you shouldn’t end up paying more than 1% a year for the management of your investments—which compares favourably to the average 2% for mutual funds—unless you opt for a robo and account offering investments other than ETFs, which typically come with higher fees.
Now that all the nationwide robo-advisors have a five-year track record, we’ve added back-dated performance data in the table above, for comparison. As robos are meant to match the portfolio to the investor, it should be understood the comparisons do not reflect how all their customers’ investments performed, and as such, this is only a starting point in any discussion around relative performance.
If you’re considering setting up an account with a robo-advisor, look on its website for performance data for the kind of portfolio you expect to set up. If it’s not posted, you can request it. You want to feel comfortable knowing that the robo has a history of capturing the kinds of returns it promises and the kinds of returns you need to achieve your goals.
Should you use a robo-advisor?
It depends on how much you’re looking to invest, suggest some experts. Dale Roberts, a MoneySense contributor and the investing blogger behind cutthecrapinvesting.combelieves robo-advisors still provide some of the best investing solutions for a vast swath of Canadians who lack both the investment knowledge to manage their own portfolio and a nest egg large enough to make a fee-based advisor worthwhile. “You need real money (minimum of $500,000) to get real advice, and most Canadians don’t have real money,” he says flatly.
Asset-allocation ETFs, which offer a diversified portfolio in a single security, aren’t really competition, in his mind. Choosing which fund to buy amounts to self-directed investing, something few investors are in a position to do. Roberts says that most “need someone to hold their hand,” by choosing the asset mix and answering questions. Robos do that cost-effectively.
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