What Is a Robo-Advisor and How Can You Get Started?
Thanks to technology, it’s surprisingly easy to invest for the long term. The rise of robo-advisors in Canada provides a simple way for you to “set it and forget it” as you strive to create a nest egg.
Let’s start with the basics. A robo-advisor is a company that takes your money and invests it automatically in a portfolio that reflects your risk tolerance. Your portfolio is created using exchange-traded funds (ETFs), which are similar to mutual funds but trade like stocks on the exchange.
It’s important to understand that robo-advisors aren’t actually robots. Instead, it’s all about the automatic investment according to time-tested investment theories. Most robo-advisors adhere to Modern Portfolio Theory (MPT), the management style put forth by Nobel Prize winner Harry Markowitz. The idea is to focus on asset allocation instead of individual stocks.
When you talk to a “real” financial advisor or money manager, they, too, will use MPT to help you put together a portfolio. They are likely to use actively-managed mutual funds and may even try to pick individual stocks on your behalf. With a robo-advisor, though, the process is automated, based on your own profile, time horizon, and goals. And, instead of actively managed funds and individual stocks, robo-advisors tend to favour index ETFs.
And, finally, let’s be clear. With Canadian robo-advisors, you’re not being shuffled off to a heartless robot. In fact, these companies are run by actual human beings — usually very knowledgeable humans with impressive backgrounds. They handle your customer service, tweak your portfolio, and make sure the computer’s algorithm and chosen portfolio still make sense for you. In many cases, the people behind the robo-advisors construct the portfolios that you automatically invest in each month.
What Do Robo-Advisors Do?
A robo-advisor is perfect if you want to start investing, but you aren’t sure where to begin. You know you need to set money aside for the future, but you might be concerned about how many choices there are. Or maybe you don’t feel like you have the time to do all the research needed to pick the right investments for your situation.
Robo-advisors are designed to help. A robo-advisor will figure out an appropriate asset allocation (the combination of stocks, bonds, GICs, and other assets), and then automatically apportion your monthly contribution to the chosen assets, in the form of ETFs.
Basically, you agree to invest a set amount of money each month and the robo-advisor automatically puts it where it will do the best as it grows. Most Canadian robo-advisors also include the opportunity to talk to someone (or at least to email or live chat) about situations as they arise. Here are five things you can usually expect from most robo-advisors in Canada:
- Access to a wide range of index ETFs that are cheaper and better options than most actively managed mutual funds.
- Straightforward contribution choices are available for a variety of accounts, including RRSP, TFSA, and RESP.
- Simple and “light” advice, depending on the company, and usually access to human customer service to answer your questions.
- Websites that are intuitive, easy to use, and visually appealing.
- Services like automatic rebalancing that help you stay on track with your long-term investment goals.
The great thing about a robo-advisor is that it costs a fraction of what many other investment advisors charge. You might pay fees upwards of 3% a year with a more traditional advisor. With a robo-advisor, your fees might be much lower — closer to 1% a year (or less). That means more of your money goes toward building your wealth.
Now, it’s true that you won’t get highly customized service with robo-advisors. Instead, you’ll get an asset allocation that generally works for you, using broad-based portfolios designed for different situations and time horizons. However, for those getting started, and those who want a long-term solution, a robo-advisor can be a great tool. You can fill in other financial and estate planning issues later when you have more assets or the need for instruments like trusts and wills.
The Top Canadian Robo-Advisors
If you are looking for a place to start with robo investing, check out some of my comparison of the best Canadian robo-advisors. These robo-advisors offer access to investments and educational tools that can help you make a solid start in your long-term investing plan.