It’s no secret that robo-advisors are on the rise in Canada. Like a few other financial innovations or resources (think free credit scores), Canada trails a bit behind her Southern neighbour when it comes to making it cheaper and easier for the average Joe to manage their finances.
However, with respect to robo-advisors in Canada, the days of “robo-scarcity” are now behind us and robo-advisors are here to stay!
Robo-advisors are online portfolio managers who provide you with low-cost professional wealth management services right from the comfort of your home.
Unlike traditional wealth management services, robo-advisors are much cheaper and have a low or no barrier to entry, making them an excellent option for the average “Joe” investor.
Below, I cover some of the best robo-advisors in Canada and their pros and cons.
Who are Robo Advisors?
Before the emergence of robo-advisors, we basically had two main approaches to investing:
- Traditional Mutual Fund Advisors or Wealth Managers, and
- Do-It-Yourself Investing
Mutual Fund Advisors and Wealth Managers
This is the most common approach where you approach your bank or investment firm and talk to an advisor.
Based on their assessment of your risk tolerance and investing goals, they offer you some of their products (usually prepackaged mutual funds) that come with fees, including the management expense ratio (MER).
Sophisticated investors or those with high net worth can also choose to work with wealth managers who provided them with customized or individualized portfolio solutions for a fee. This service may also come with tax and estate planning etc.
The traditional model of investment management often involves fees in the range of 2% or more per year. Learn more about investment fees in Canada.
The DIY Investor
The other option for investing was through a do-it-yourself approach.
DIY investors can buy mutual funds or ETF’s using a self-directed account they open on a discount brokerage. They are responsible for asset allocation, occasional portfolio re-balancing, and also ensuring that their portfolio is adequately diversified.
Not everyone has the financial knowledge, time, and confidence to manage their investment portfolio on their own. And, that is where robo-advisors come into play. They are the middle point between full-fledged wealth management services and the DIY folks.
Signing up is usually a breeze. In general, you are required to complete a questionnaire which they use to understand your risk tolerance, investment goals, time horizon, and so on.
Following this, you are provided with a personalized portfolio that is based on the Modern Portfolio Theory and is designed to meet your investing needs.
The make-up of the portfolio is usually based on low-cost Exchange Traded Funds (ETFs) and it is re-balanced automatically as needed.
Most robo-advisor portfolios are passively managed using indexing strategies, however, a few add on some level of active money management as well.
List of Robo-Advisors in Canada
- Wealthsimple – Get a $75 cash bonus when you open an account and fund it – #1 Choice!
- Questwealth – Get up to $10,000 managed for free for 1 year
- CI Direct Investing – Formerly WealthBar
- RBC InvestEase
- BMO Smartfolio
- Nest Wealth
- Modern Advisor
- Virtual Wealth
Advantages of a Robo-Advisor
1. Low Cost
Fees charged by robo-advisors are much lower than the average you will pay for the traditional mutual fund sold via the big banks.
For example, compare 0.5% in fees per annum at Wealthsimple for a portfolio with $0-$100,000 in investable assets and 0.4% in fees for a portfolio with over $100K in assets.
This is definitely low-cost compared to the average of 1.98% or more in fees you would expect when you go with actively managed equity mutual funds. Wealthsimple also offers to manage your funds for free during the first year.
In addition, the fees are quite transparent and they do not muddle the pond with obscure and additional charges like trailer fees, sales loads, etc. Some robo-advisors take low-fees further by offering free management of your money up to a certain amount.
Lower-cost portfolios provided by robo-advisors are possible due to a mix of passive management, the use of low-cost ETFs, technology, and less overhead.
2. Personalized – Rebalanced – Diversified Portfolio
When average investors choose to not manage their own portfolios, it’s often because they feel they don’t have the requisite knowledge to do so, or do not have the time.
Robo-advisors provide solutions to these problems – they set up a personalized portfolio with assets allocated to cater to your risk tolerance, time horizon, and investing goals.
And you don’t have to worry about rebalancing the portfolio regularly and ensuring it’s well-diversified. The “robos” do all that on your behalf.
3. Digital and Environment-Friendly
This is one reason why technology-loving millennials love robo-advisors. There’s no need to walk into a brick-and-mortar building, no need to talk to an advisor, no closing hours… you can set up your account from the comfort of your home using your smartphone, tablet, or laptop. It’s that simple!
This is not to say that robo-advisors are only meant for Gen Yers. Anyone can easily use their services, and if you want to speak to someone, there’s usually someone available to talk or chat with you.
Having little to no paperwork is also a vote for the environment and trees!
4. Low Minimum Investment
Many robo-advisors don’t have a minimum investment requirement. As such, they offer a low-barrier entry to obtaining professional and individualized wealth management service that you may not be able to access otherwise.
5. Tax Efficiency
Many robo-advisors incorporate or offer tax-loss harvesting strategies that involve selling assets that have lost value and using the capital loss to lower or wipe out other capital gains realized on the rest of your portfolio. They then proceed to buy another asset in place of the one that was sold.
The outcome of tax loss harvesting is that you save on taxes in the short term while growing your investment.
6. Safe and Insured
Robo-advisors hold your money at a bank that is a member of the Canadian Investor Protection Fund (CIPF). Therefore your funds are protected from insolvency just like the other monies you have in your bank – up to $1 million per account.
They are also regulated entities within Canada and are subject to federal and provincial securities regulations.
You can open many types of accounts to meet your different investing needs. For example, you can open a TFSA, RRSP, RESP, RRIF, non-registered accounts, and more.
Downsides of a Robo-Advisor
1. No Brick-And-Mortar
If you are the type of person who shuns digital banks because you would rather walk into a brick-and-mortar bank for all your banking transactions, the idea of robo-advisors will likely put you off.
Unlike the name suggests, “robo” advisors are not all about robots and algorithms. You can talk to someone if you want to. However, most activities related to your account will be conducted via an online platform.
Robo-advisors use technology (algorithms and models) to manage your portfolio. As we all know, technology is a beautiful thing until it isn’t. If there are glitches or hacks and something goes wrong, there could be problems.
However, the possibility of this occurring is pretty slim and robo-advisors use security similar to what your bank is using. 😉
The investing landscape in Canada is changing – for the better. Robo-advisors are just one of the recent additions and are another option to consider when making a decision on how you want to manage your money. As per usual, always do your research and go with what works for you.
For a complete list of Robo-Advisors in Canada and comparisons between them, check out this guide.