What Is A Robo-Advisor?
Robo-advisors are digital platforms that fall into the middle between Do-it-Yourself online discount brokerage platforms and full-service human advisor platforms.
The ‘robo’ part is a clever way to imply that robots are investing your money, but more precisely, robo-advisor platforms provide you access to an algorithm that automatically recommends an asset allocation for you based on your answers to relevant profile questions.
In addition to an algorithm-derived asset allocation (also known as: split between stocks and bonds), the robo-advisor recommends investment products for you to purchase. Most commonly, robo-advisors recommend Exchange Traded Funds, but some include mutual funds as well.
The process typically involves you sitting comfortably at your home computer answering questions about your financial situation, goals, and timelines. This information is fed to the firm’s proprietary algorithm resulting in a recommended portfolio to meet your needs.
You’ll set up your accounts right there on the robo-advisor’s website. Most can accommodate all types of accounts from RRSPs, to TFSAs to corporate accounts – but check first if you need a less commonly supported account like a Registered Disability Savings Plan.
You can expect easy account set-up, decent online help from a service desk, standard security features, robust goal planning tools, and comprehensive educational reading materials.
And low fees! But there are fees, nonetheless.
You’ll pay the robo-advisor firm fees for creating the algorithm, doing the research to compile the recommended investment products, executing the trades, creating and supporting the online platform, planning tools, and educational materials. Expect these fees to be lower than a human advisor, but higher than an online discount brokerage.
You’ll also pay the fees for the investment products themselves – the annual Management Fee paid to the firm producing the Exchange Traded Funds or Mutual Funds.
The value you get from a robo-advisor is the luxury of an algorithm objectively determining your asset allocation and a firm professionally recommending your investment products.
If you’re struggling to settle on your best split between stocks and bonds, this is a great service for you. And doubly so if you like the idea of investing in products that have been vetted as appropriate for you.
Another helpful service most robo-advisors provide is automatically rebalancing your portfolio, so you stick to your target asset allocation. This is a value robo-advisors provide to earn their ongoing annual fee and for a lot of busy people, it’s a reliable and important element of the service.
If you already have a pretty good idea what your asset allocation should be and you’re confident in your own logic in choosing investment products, then robo-advisors are probably a waste of money for you – even though the fee’s usually only between 0.3% and 0.5% annually.
However, if you like the idea of being a DIY investor but are not quite ready to jump right in and make all the decisions yourself, robo-advisor platforms are an excellent option for you to consider. Next step for you: do a search for ‘robo-advisor Canada’ and do some clicking around a few platforms to compare services.
