Taking control of my finances and becoming a do-it-yourself investor was one of my greatest accomplishments. I always tell people that it’s pretty easy to become a DIY investor, all you need to do is get over your initial fears and do a little bit of research. Setting yourself up as an index investor is not difficult, but it still requires some yearly work and maintenance which still intimidates many people.
It doesn’t surprise me that many people still prefer to work with a traditional advisor. The problem is, unless you have a sizable portfolio, financial advisors at the retail level may do you more harm than good. The fees that are embedded into mutual funds will eat into your returns. Now that being said, using a fee-only financial planner offers incredible value, even though they can be “expensive.”
With the introduction of robo-advisors in Canada, Canadians now have more options. WealthSimple, Nest Wealth, and WealthBar (now known as CI Direct Investing) all have established roots and are taking on clients in select provinces. To be clear, robo-advisors aren’t actually robots, they’re online advisors that help build custom portfolios with minimal human interaction. They’re relatively new in Canada, but in the U.S., robo-advisors have been around for years and manage an estimated $15 billion US dollars!
Why work with a robo-advisor?
The most obvious reason would be the lower fees. The cost of using a robo-advisor falls somewhere between being a DIY investor using index funds and using a financial advisor who recommends mutual funds. The bigger your portfolio, the more you save but think of those long term savings.
“Compared to the average Canadian balanced mutual fund, a forty-year-old starting with $150k and saving $1,000/month will save over $300,000 on fees alone by age 65,” says Tea Nicola, CEO and co-founder of Wealthbar. “This continues to add up all throughout retirement, the fee difference can mean being able to retire 10 years earlier than if you were invested in a balanced mutual fund.”
Since robo advisors in Canada never need to meet clients face-to-face, nor do they have a brick and mortar operation, they’re able to keep costs low and pass on those savings. Technology pretty much automates the mundane day-to-day tasks further reducing costs without compromising the quality of any investment advice.
It’s also a matter of convenience. People’s lives are increasingly busy, so why bother trying to fit in an appointment during banking hours when you can simply do everything from the comfort of your own home. With robo-advisors, you can open an account, create a financial plan, and get financial advice all online.
Why pick robo-advisors over a traditional advisor?
Despite recent changes with regulations, many advisors still aren’t being transparent. Mutual funds often have confusing performance records as well as hidden commissions and costs. Robo advisors in Canada tend to be much more clear and are able to present data instantly online in a clear way. Clients know exactly how their investments are performing and what they’re paying.
Don’t forget, many financial advisors at the retail level lack any serious training, so their financial advice might be limited. When dealing with robo-advisors, you’ll be assigned a personal financial advisor regardless of your portfolio size. Getting solid advice is the key to increasing your financial literacy and making sure you develop good financial habits.
If your portfolio is well into the 7-digit range and you require some more complicated advice in regards to tax planning, and estate planning, then maybe you’re probably better off using a fee-only financial planner. That being said, the services robo-advisors offer is growing. WealthBar dubs themselves Canada’s only full-service online wealth manager and offers services beyond just financial planning and investment management.
“We also offer insurance services and can provide a simple estate legal package (will/power of attorney/living will) through an affiliate for under $100.00,” says Nicola. “For clients who have funds that they cannot transfer (such as Group RRSPs), we will help them select investments within the plan that suits their profile and objectives and are in sync with their WealthBar’s accounts.”
The ETFs used by robo-advisors are industry leading and selected based on performance, track record, holdings, assets under management, price, trade volume and country of origin. In theory, you could copy the recommended portfolios on your own but with robo-advisors the process is simplified and you get access to a financial advisor to guide you through the steps.
Using a robo-advisor is a unique experience since your investments are automated, yet you still have access to a financial planner. If you do need to talk to a live person, you’ll always be able to talk to someone over the phone. Any changes to your portfolio or a financial plan review will only take about 20 minutes.
Robo-advisors pride themselves on helping Canadians understand their household finances, that’s how they differentiate themselves from traditional advisors– that and lower fees of course. That being said, online or in person, no 2 advisors are alike so be sure you ask a few questions in advance so you’re completely comfortable with your advisor before making any investment decisions.