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If you’re looking for a low-cost way to invest, consider a robo-advisor. A robo-advisor is a technology platform that automates the investment process. You deposit money into an account held by the robo-advisor and it invests those funds for you in a basket of pre-determined securities. Robo-advisors generally charge lower management fees than traditional money managers, they have low or no account minimums and they do everything from you, from determining asset allocation to portfolio rebalancing.
The first robo-advisor in Canada launched in 2014, and while there are more options on the market today, and their popularity is increasing, they still hold a small amount of assets compared to traditional banks, investment firms, mutual funds and online brokerages. Canadian robos will hold an estimated US$8.1 billion in assets under management (AUM) in 2021, and US$16.1 billion by 2023.
What is a robo-advisor?
A robo-advisor is an online platform that automates the investing process. The software will ask you questions about your financial background, future goals and risk tolerance and then use your answers to build and manage an investment portfolio on your behalf. Most do not make use of financial advisors, though some are exploring ways to incorporate both automative and human advice.
Robo-advisors generally invest in exchange-traded funds (ETFs). An ETF is a security that holds a number of securities–usually stocks, bonds or both–and trades on a stock exchange. They tend to be well diversified and transparent, in that you can see exactly what the fund holds. Most ETFs come with low management fees, because, unlike mutual funds, they don’t utilize a fund manager to pick what stocks go into the fund. Rather, they’re designed to track and replicate the returns of an underlying financial market index.
Robo-advisors prefer using ETFs to mutual funds because they’re low cost, diversified and easy to trade–ideal for an automated process. Of course, robo-advisor firms aren’t run by robots. They all employ actual humans to determine what ETFs their platforms will make use of and what sort of asset allocation is right for people’s various risk tolerance levels. (A more aggressive portfolio might have more emerging market equities than a conservative portfolio, for instance.)
Some robo-advisors may offer human assistance through customer support or access to a financial advisor, while some also offer financial planning tools.
Because most day-to-day investing functions are automated, robo-advisors are able to charge less than financial advisors or other money management firms.
Best Robo-advisors in Canada
Each robo-advisor in Canada has different account minimums and portfolio management approaches. In alphabetical order, here’s a quick overview of each firm.
How it works: BMO Smartfolio calls itself an “online portfolio management service” rather than a robo-advisor, and emphasizes the human side of its business. It offers five model portfolios designed by fund managers from BMO Global Asset Management, all containing BMO ETFs. Based on risk tolerance (from low to high): capital preservation, income, balanced, long term growth and equity growth. The team of fund managers will actively monitor your account, as well as adjust the model portfolios as needed.
Management fees: 0.7% (first $100,000), 0.6% (next $150,000), 0.5% (next $250,000) and 0.4% (above $500,000).
Minimum account investment: $1,000.
How it works: Invisor is an affiliate company of Alliance Insurance & Financial Services Inc. and offers seven portfolios categorized by risk tolerance that hold various ETFs. According to its website, Invisor keeps its asset allocation “closely in line with global market weighting,” meaning more than 50% is allocated to U.S. equities, less than 5% is in Canadian equities, and the rest is invested in international equities. Invisor’s services include oversight by investment professionals, portfolio monitoring and rebalancing, market updates, plus a goal planning and tracking tool called InvisorGPS.
Management fees: Flat 0.5% fee.
Minimum account investment: None, but deposits are held in cash until the account reaches $1,000.
How it works: Justwealth offers a slightly more personalized approach and assigns clients a “personal portfolio manager” to oversee your account and answer any questions. Based on your questionnaire answers, Justwealth offers account recommendations from more than 70 different portfolios based on investing objectives such as growing wealth, generating income, or preserving wealth. The portfolios invest in a mix of more than 40 ETFs from nine different providers, and tax loss harvesting is offered.
Management fees: 0.5% on the first $500,000 invested, with a minimum fee of $4.99 per month. For accounts over $500,000, the annual fee is 0.4%. RESPs have a minimum fee of $2.50 per month.
Minimum account investment: $5,000 (none for RESP accounts).
How it works: Nest Wealth provides investing services for individual investors, employers, and financial advisors and financial institutions. Based on your financial profile, it invests in seven different ETFs across seven different asset classes: short- and medium-term bonds, real return bonds, Canadian equities, U.S. equities, global equities and real estate. Once you start investing, the service takes over monitoring and rebalancing your portfolio.
Management fees: $20 per month (up to $75,000), $40 per month ($75,000-$150,000) or $80 per month ($150,000+).
Minimum account investment: None.
How it works: Another offering from one of Canada’s Big Five banks, RBC InvestEase has two main types of portfolios: standard and responsible investing. Within each, there are four to six different bond and equity ETFs, all from RBC iShares. The responsible portfolio excludes ETFs that contain shares from companies that deal in tobacco, controversial weapons, civilian firearms and other controversial business dealings. RBC clients can also access a team of portfolio managers.
Management fees: Flat 0.5% fee.
Minimum account investment: No minimum, but deposits are held in cash until the account reaches $100.
How it works: WealthBar bills itself as “full service” because it offers hands-on advice, planning and management. WealthBar offers two types of investments: low-cost ETFs and private investment portfolios. There are five types of ETF portfolios depending on risk tolerance (conservative to aggressive). The three private investment portfolios invest in “unconventional assets” such as private equity, real estate, mortgages, alternative strategies and preferred shares. Tax loss harvesting is available, and there’s also the option to add the socially responsible Cleantech fund to your portfolio.
Management fees: 0.6% (up to $150,000), 0.4% ($150,000-$500,000) or 0.35% ($500,000+).
Minimum account investment: $1,000.
How it works: After assessing your age, income, investing goals and appetite for risk, Wealthsimple invests your money into one three ETF portfolios: conservative, balanced or growth. Wealthsimple also offers a variety of socially responsible investing options that focus on cleantech, low carbon and Halal investing. Besides automated rebalancing, dividend reinvestment and tax loss harvesting, it also has special features such as Wealthsimple Roundup, which automatically invests your spare change into low-cost ETFs.
Management fees: Wealthsimple has two tiers, Wealthsimple Basic (0.5% on your first $99,000) and Wealthsimple Black (0.4% for $100,000 and above), which includes a one-on-one financial planning session and Priority Pass airport lounge access. Account balances of $500,000 or more are upgraded to Wealthsimple Generation, which includes in-depth financial planning, tailor-made portfolios and Priority Pass membership.
Minimum account investment: None.
You don’t need expertise—or a lot of money—to start investing with robo-advisors. Robo-advisors work for anyone who wants a more automated, hands-off approach to portfolio management. Before investing through a robo-advisor, it’s important to know the company’s fees, types of accounts offered, how your money will be invested and features such as customer service, access to human advisors, tax-loss harvesting and additional financial planning tools.
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How do robo-advisors work?
When you open an account with a robo-advisor, you’ll have to answer some questions related to your annual income, financial goals, risk tolerance and time horizon (aka when you’ll need the money). Your robo-advisor’s technology uses algorithms to process your personal information, build a financial profile and allocate certain percentages of your deposits to the most appropriate investments.
For example, a 30-year-old with a higher risk tolerance and longer investing horizon may get put into a portfolio made up of 80% stocks, 15% bonds and 5% cash or other investments. A 65-year-old individual who is nearing retirement and may, therefore, need to protect their principal, would get put into a conservative portfolio made up of 70% bonds, 20% stocks and 10% cash or cash-like instruments. (Bonds are loans made to a government or company for a set period of time in exchange for an interest payment. They’re usually much less volatile than stocks.)
Robo-advisors also automatically monitor your portfolio’s performance and rebalance when needed. Rebalancing is what happens when gains or losses in certain areas cause your asset allocation to drift outside your targeted percentages. If that occurs, the robo-advisor will automatically rebalance the account back to your desired asset mix. (Say for example, the stock market declines and the value of your stocks fall so that your asset mix of 80% stocks and 20% bonds is now 70% stocks and 30% bonds. The robo will automatically sell out of some bond ETFs and buy more stock ETFs to put you back in balance.)
Most robo-advisors offer a variety of investment accounts, including tax free savings accounts (TFSAs), registered retirement savings plans (RRSPs), spousal RRSPs, registered retirement income funds (RRIFs), locked-in retirement accounts (LIRAs) and registered education savings plans (RESPs). Many robo-advisors also offer non-registered personal and business investment accounts, while some also offer joint chequing and saving accounts where you can just keep cash.
Robo-advisor fees and taxes
Some robo-advisors charge a flat rate, while others have a percentage-based fee structure and charge 0.2% to 0.5% of a client’s total assets under management. For example, if you invest $10,000 and your robo-advisor charges a 0.5% management fee, you’ll pay $50 annually for its services. Some robo-advisors have promotional offers, such as managing a certain amount of money for free, or free portfolio management for a certain period of time.
How investments are taxed depends on the type of account they’re held in (TFSA, RRSP, etc.). Some robo-advisors offer tax loss harvesting to help reduce your tax bill, which means it will sell securities at a loss when applicable to help offset capital gains or taxable income from other securities.
Can you trust robo-advisors?
When it comes to making decisions that affect your financial future, robo-advisors invest based on the information you provide. Robo-advisors aren’t supercomputers designed to outsmart the market—they’re an automated investment vehicle that invests mainly in diversified, index-tracking ETFs. No matter how you invest, whether it’s with a financial advisor, a robo-advisor or in a self-directed portfolio, it’s important to identify your risk tolerance so you (or your robo-advisor) can choose the right investments.
Whether or not a robo-advisor is right for you depends on a few factors, including your investing style, income and net-worth, and whether your financial situation is complicated enough that you a need professional wealth manager and more specific tax advice. (However, robos aren’t just for people with few assets. An increasing number of high net-worth individuals like their ease-of-use, too.) If you want to pick your own investments and managing your own portfolio, or if you want human contact and fully personalized investment advice, robo-advisors may not be for you. Some robo-advisors, also called hybrid-advisors, though, do offer a human component.
Robo-advisor vs. mutual fund
A mutual fund is another way for someone else to invest on your behalf, but there are several differences in how robo advisors and mutual funds work.
With a mutual fund, a group of individuals pool their money into a single account that invests in stocks, bonds and other securities. Investors buy into a mutual fund by purchasing shares (called units), and new units are created whenever additional people invest. A fund manager actively chooses the investments and manages the portfolio with the goal of outperforming the market. Because mutual funds are actively managed, they have higher fees of up to 2.5%.
With a robo advisor, you invest using an individual account such as a TFSA, RRSP or an RESP. The robo advisor’s algorithm will automatically set a portfolio allocation based on your financial profile. Robo advisors typically buy low-cost ETFs and are passively managed, so they have lower fees than mutual funds.