Are Robo-Advisors Right for You?

Date posted: Aug. 25, 2017
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Are Robo-Advisors Right for You?

Photo by Lee Campbell

Twenty years ago, when it was time to start investing for your future, you had one option: Go to your local bank, sit with your local financial advisor and open up a mutual fund that charges you high fees for relatively small returns. It was the only option, and it’s what most Canadians chose. In the last ten years, however, many new options have arrived on the financial scene, including robo-advisors.

Unlike mutual funds, which are managed by an individual or individuals who claim to be able to beat the stock market and produce better than average returns, robo-advisors manage a portfolio automatically with minimal human intervention. So is a robo-advisor right for you? Let’s look at some pros and cons of choosing this relatively new way to invest your money.

Pros

Easy Setup

When you invest in mutual funds through your local bank, you have to go into your bank branch, meet with a representative, fill out paperwork and scrawl your signature across multiple pages. In contrast, getting set up with a robo-advisor is much more straightforward.

Typically, you can set up an account with a robo-advisor from your computer by filling out an online questionnaire and transferring as little as $500 into your account. The questionnaire matches your investment timeline and risk tolerance to an ideal asset location and tailors your investments to your unique preferences. This process is done automatically by a computer, so there is no waiting, and you can get started with investing right away.

Low Fees

Mutual funds in Canada are notorious for having high management expense ratios (MERs). MERs are the fees that you are charged by the bank to manage your money. Mutual funds in Canada typically charge a fee in the range of 2.5% of your portfolio value per year, while robo-advisors, due to the automated nature of their work, charge lower fees, often lower than 1%. While this may not seem like a large amount of money (and it isn’t when your portfolio is small), those small fees can add up to hundreds of thousands of dollars over the life of your retirement savings.

Transparency

Most robo-advisors have detailed online dashboards showing your investment returns over time. This transparency is often greater than those you’d find with mutual funds, so you can keep an eye on your money without having to get in touch with your financial advisor. Some robo-advisors even have an app so you can check on your investments on your phone.

Cons

Hands-Off

The main concept of robo-advisors is that they employ a hands-off, passive investing strategy. That means there is no human actively attempting to beat the stock market with your money. Instead, a robo-advisor is content to mirror the returns of the market (which are often very good) and use their extra low fees to make up the difference.

For example, if an actively managed mutual fund averages an annual return of 7.5%, and the fund manager charges you a 2.5% MER to manage your money, your effective return is 5%. In contrast, the passive robo-advisor fund may only return 6% annually, but with a MER of just 0.5%, your effective return will be 5.5%, or higher than the actively managed fund.

Some Canadians prefer to have an active investor managing their money who they can call for reassurance during a down market, who will calm them down when their money is dwindling. This isn’t an option with a robo-advisor, because there is no human managing your money.

Poor Customer Service

Finally, due to the bare-bones style of investing with a robo-advisor, some customers have reported poorer customer service. Sometimes it can take a little longer to get a customer service representative on the phone if you have questions or to hear back from them via email. For seasoned investors, this is no problem, but for newer investors who aren’t accustomed to the normal swings of the market, it could result in some bad financial decisions.

So is a robo-advisor right for you? If no-frills, passive investing on an online platform with a lot of transparency sounds appealing, then it might be. If you’re the type of person who is very nervous about investing in the stock market and would prefer a human that can walk you through the process, then investing in a traditional mutual fund at a big bank would be a better choice.

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