This post may contain affiliate links. Please read my disclosure for more info.

Robo-advisors, also known as online portfolio managers, are the new trend for novice and experienced investors looking to cut their investment fees while maximizing their long-term returns. Investment fees and returns are always an engaging topic of interest (as they should be).

Traditional mutual funds are expensive, particularly on this side of the border (oh, Canada!). Among the most developed nations of the world, Canada has consistently ranked at the bottom for having some of the highest investment fees.

One potential and a partial reason for the anomaly of high investing fees in Canada could be that we Canadians are so besotted with mutual funds, that fund managers have had no incentive to cut fees to stay competitive or to retain our business.

Mind you, the argument often raised for charging investors high fees (i.e. that you get what you pay for) doesn’t generally hold water when it comes to the world of investing. While there are ‘star’ managers out there who shine from year to year, they are in the minority.

Fact is, most mutual funds (over 80% of them) do not consistently outperform their benchmark index. The result of this being that you, the investor, end up realizing returns on your investment that are lower than what the market (representative index) as a whole has generated. In other words, you are leaving money on the table and/or losing money.

What is a Robo-Advisor and How Do They Invest Your Money?

While the term ‘robo-advisor’ may inadvertently bring the picture of ‘mindless’ robots moving around to your mind, this is not the case here. ‘Robo-advisor’ is the techie name for online wealth management firms that use sophisticated algorithms which are programmed to invest your money automatically based on Nobel Prize-worthy models. Behind the scenes, you have humans who make sure the computer programs are running fine and everything is hunky-dory.

To understand the role robo-advisors play, think about ‘active’ vs. ‘passive’ investing. Active investing involves trying to continuously buy and sell stocks (financial assets) or put together a portfolio of assets that perform better than a similar portfolio that is ‘buy’ and ‘hold’ – aka passive investing. As an active investor, you are essentially trying to beat the market.

Because active fund managers are busy and need to continuously monitor your portfolio, hire analysts to do research, etc., they charge more in fees… popularly referred to as the Management Expense Ratio (MER).

Outperforming the market is great if you can do it consistently after deducting fees. However, the reality is that because fund managers often underperform and rarely earn enough in additional gains to justify their fees, investors are left holding the short end of the stick.

When you use a robo-advisor, what you get is passive investing and lower fees.

Robo-Advisor Comparison Summary

This post may contain affiliate links. Please read my disclosure for more info.

How Do Robo-Advisors Invest Your Money?

Passive investing strategies aim to generate market returns. Using low-cost ETFs, a robo-advisor takes an investor’s risk tolerance, investing time horizon, and investment objectives into consideration to design a portfolio that suits their needs. This portfolio is adequately diversified (lowering risk) and is rebalanced automatically (saving you time and stress).

By using low-cost ETFs as cheap as 0.03%, and by charging very low management fees (average of 0.50% compared to 2% for mutual funds), robo-advisors save you a lot of money in fees. Combine market returns (minus fees and tracking error) with lower management fees, and you see why the average investor may be better served using a robo-advisor.

When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds. – Warren Buffett

Lower costs are the handmaiden of higher returns. – John Bogle

The two greatest enemies of the equity fund investor are expenses and emotions. – John Bogle

Related: The Complete Guide To Robo-Advisors in Canada

How To Choose The Right Robo-Advisor

The robo-advisors in Canada generally operate around the same basic concepts. However, there are still some distinct differences between them that may make one robo-advisor preferable to you (or not). You should look at all the pros and cons of individual robo-advisors before making your choice.

The main parameters to compare include:

1. Investment Fees

The fees you pay when you invest with a robo-advisor can be divided into two main categories: 1) A Management Fee which is what they charge you for managing your money, and 2) The ETF MER which is built-in into the ETFs that make up your portfolio and goes directly to the fund companies.

Let’s focus on the fees robo-advisors charge:

  • Wealthsimple: 0.5% per year ($0 to $100,000) or 0.4% ($100,000+)
  • Nest Wealth: $20/month ($0 to $75,000), $40/month ($75,000 to $150,000), and $80/month ($150,000+)
  • Wealth Bar: 0.35% to 0.6%
  • Planswell: 0.5% ($0 to $100k) or 0.4% ($100k+)
  • ModernAdvisor: 0.5% ($10k to $100k), 0.4% ($100k to $500k), or 0.35% ($500k to $1 million)
  • Justwealth: 0.5% ($5k to $500k) or 0.4% ($500k+)

Scenario 1: What do you pay on a $75,000 portfolio on an annual basis?

  • Wealthsimple: $375
  • Nest Wealth: $480
  • WealthBar: $420

Mind you, a typical equity mutual fund would cost you about $1,763 per year for the same portfolio size. This is using the average MER of 2.35% charged by equity mutual funds.

Scenario 2: What can you expect to pay on a $500,001 portfolio?

  • Wealthsimple: $2,000
  • Nest Wealth: $1,060 (including $100 maximum trading fees)
  • Justwealth: $2,000
  • WealthBar: $2,270
  • ModernAdvisor: $1,750

What is the verdict?

For smaller accounts (less than $100k), Wealthsimple generally offers the most competitive fees, even after factoring in other costs, including trading and ETF fees. Planswell and ModernAdvisor are also great. For larger portfolios (greater than $500k), Nest Wealth beats the competition on fees.

Related: Bonds And Their Place In Your Portfolio

2. Minimum Investments and Promo Offers

Some robo-advisors require a minimum investment, while others allow you to open an account with $0. They may also offer promotions that allow you to invest up to a certain amount FREE of charge.

  1. Wealthsimple: No minimum account balance. You can invest up to $10,000 free for 1 year (promo link here)
  2. Nest Wealth: No minimum investment requirement. You invest free of charge for your first 3 months (promo link here)
  3. WealthBar: $1,000 minimum investment. You invest up to $15,000 free of charge for 1 year (promo link here)
  4. Planswell: No minimum balance. Invest up to $20,000 free for 1 year (promo link here)
  5. ModernAdvisor: $1,000 minimum investment. Your first $10,000 is invested for free
  6. Justwealth: $5,000 minimum investment. Get up to $500 in cash bonus when you open an account.

How To Choose a Robo-Advisor

3. Average MER

In addition to the annual management fee charged by robo-advisors, your portfolio will pay some direct fees to the ETF companies. All robo-advisors pay these fees and while you should not get hung up on them, they are worth noting and will fluctuate from time to time.

Average ETF costs I could find online include:

  • Wealthsimple: 0.20%
  • WealthBar: 0.26 – 0.32%
  • ModernAdvisor: 0.25%
  • Planswell: 0.17%
  • Justwealth: 0.25%

Note that even if you have a self-directed account with a discount brokerage, ETF MER fees still apply. However, since fees are FEES, they are worth noting because they impact your overall returns.

Related: Registered vs. Non-Registered Investment Accounts

4. Accounts Available and Investment Choice

Many of the featured robo-advisors offer registered accounts including the usual suspects, such as TFSA, RRSP, RESP, RRIF, LIRA, and non-registered accounts (joint and individual). Of note,

  1. Wealthsimple also offers a Smart Savings Account (high-interest savings), Roundup (a feature that allows you to save and invest your loose change), and Wealthsimple Trade (a $0 commission stock trading app).
  2. WealthBar can help you with estate planning, insurance needs analysis, and tax optimization.
  3. Planswell can help you combine your investing, insurance, mortgage, and borrowing using their one-stop solution.
  4. Justwealth offers an Education Target Date RESP portfolio for your kids.
  5. ModernAdvisor offers a trial account for undecided investors.

On the investment choice front, robo-advisors offer an array of low-cost ETFs to build your portfolio. In general, portfolio types will vary from Conservative (safety) to Balanced and to Growth (assertive).

Personally, I think focusing on the number of ETFs a robo-advisor has in their stable is somewhat contrary to the main idea of passive investing which is about keeping things simple while getting adequate diversification.

Wide diversification is only required when investors do not understand what they are doing. – Warren Buffett

To earn the highest of returns that are realistically possible, you should invest with simplicity. – John Bogle

Related: Index Investing For Beginners

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5. Other Robo-Advisor Features

Other important features that will be attractive to some investors include:

1. Ethical Investing: Wealthsimple, WealthBar, and ModernAdvisor offer opportunities to invest in social and environmental-friendly portfolios. Mind you, you will pay a bit more in fees for this service.

2. Financial Planning: Most robo-advisors offer some level of FREE financial advice. If you want more than the basics, additional fees will apply.

3. Hybrid Investing: Some investors want a mix of automation and customization. WealthBar and ModernAdvisor offer a hybrid option that is a mix of active and passive investing strategies. As expected, you pay a bit more in fees for this service.

4. Apps: Millennials and Gen Z’ers love technology and prefer to do everything on a smartphone or tablet. Wealthsimple’s mobile app is considered the best of them all and is highly rated on the Apple app store.

5. Referral Program: Available referral programs may be worth looking into as well. Some of them are mouth-watering. Wealthsimple lets you invest $10,000 free for each friend you refer to Wealthsimple.

Which Robo-Advisor is Right For You?

If you feel confused already, I don’t blame you.

There is no one single answer and since this is your money we are talking about, you will need to carefully look at all the available options/features before making your choice. Personally, I find that Wealthsimple hits all the high notes for my investing needs, but that being said, I do not have a $500k portfolio, and who knows I may prefer a hybrid option when I reach that milestone.

One conclusion we can all easily agree on is that you will likely save tens of thousands of dollars (maybe more) if you simplify your investing and pay less in fees. The right robo-advisor will save you fees and lots of stress. So, choose wisely!

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Robo-advisors can help you invest on auto-pilot, save on investing fees, and maximize your returns. Here's how to choose the robo-advisor that's right for you! #roboadvisor #investing #money #wealth #automation #personalfinance #stockmarkettips #ETFs