What is a Robo-Advisor? Are they Right for You?

There have been a host of changes in the financial landscape over the last 10 years, and the rise of the machines of one of them: a Robo-Advisor.

What is a Robo-Advisor?

How do they work?

Is a Robo-Advisor right for you?

Read on for these answers in today’s post including our own take on this popular trend for investors who might just be starting out, who we believe can benefit from any training their investing brain.

What is a Robo-Advisor?

Sounds like something of out a Terminator movie right?

Well, somewhat – except you do get to meet with a real, live human-like John Connor if you need to – and these robo-advisors are here to help!

Robo-advisors — which may also be described as automated, online investing services – essentially use algorithms to build and manage your investment portfolio. Depending on the robo-advisor you work with, their services vary: you can get automatic portfolio rebalancing and some tax optimization without any human interaction. Of course, as we mentioned, a real, live human in the form of an advisor can always be contacted for questions.

So, consider a robo-advisor is a digital investment platform where you can save your money, invest your money, grow your money in the stock market with support – without choosing any individual stocks or funds on your own.

You get help to train your investing brain.

How do they work? Could a Robo-Advisor be right for you?

At the beginning of any investment process, pretty much any robo-advisor will typically have you (as a prospective client) answer a few questions to determine your investing knowledge and/or appetite for investment risk.

Based on your responses, using their own computer algorithms, your answers will help determine an asset mix for your portfolio: a mix of stocks, bonds, and cash in most cases. The algorithm will make recommendations for appropriate investments (using low-cost Exchange Traded Funds (ETFs) as we use) – thereby helping to diversify your investment portfolio (and manage your investment risk).

Further reading:

Build a low-cost, diversified ETF portfolio using these funds here.

Given the automation involved, there are lots to like about robo-advisors. Here are some key benefits we can think of in going this route.

Pros

The use of your own data is an advantage – to remove any biases you might have when it comes to investing in any asset class.
We like that most firms offer very easy account set-up processes, sound goal planning questions, and ongoing education with a human support representative if and when you need it.
Low-fees. As you know by now when it comes to investing: fees matter. Generally speaking, the lower and longer you can keep your investment fees, the more money you can keep for yourself, the more money you can invest, and that money invested has the potential to make you more money. It’s a phenomenal process when done right! When you open an account with a robo-advisor, you’ll find out they typically collect about 1% less in overall fees than any professional investment advisor. Robo-advisors can do this, for the most part, because they have automated so much of their work. Those savings are passed on to you as the client. Consider this: a professional investment advisor charges say a 1% fee. On $50,000 invested, that’s charging you $500 every year whether your portfolio goes up or down. That’s just their fee. There are also some fees to own the ETFs or funds selected by your professional advisor. You can see how these fees might add up!!

With all these benefits, you might be thinking it’s too good to be true – working with a robo-advisor.

Well, we also see some drawbacks too.

Cons

For investors, who might really appreciate the human connection, while robo-advisors do have their advisors to connect with pretty much anytime we can appreciate this model does not suit every investor need. So, if you enjoy working very closely with your advisor, in a 1:1 setting or visiting your advisor to talk about more complex financial or tax issues – such as estate planning – you might want to consider other alternatives.
While robo-advisors are an excellent addition to the financial landscape in our opinion, there are even LOWER cost options for investors – including a more pure Do-It-Yourself (DIY) investing path. As a passionate DIY investor, you can potentially reduce your investment costs to near nothing now that some financial institutions offer commission-free investing.

Further reading:

Here is how you can get started with investing.

In fact – one of our favourite discount brokerages is a partner with Cashflows & Portfolios
At Cashflows & Portfolios, one of the founders is still investing with Questrade after 20 years! Continually one of Canada’s leading/best-of online brokerages year after year. There are several reasons why we like Questrade: i) great mobile experience, ii) great customer service, and iii) commission-free ETF investing!
You can take advantage of our partnership with Questrade by opening an account: sign up with this link to receive a $50 trading credit!

Is a Robo-Advisor right for you?

We believe robo-advisors are a strong choice for those who want to start investing for the first time or for the experienced investor who wants to save a bit of money on fees but remains hands-off with their investment portfolio.

The big benefits you get with any major robo-advisor is a focus on:

Passive investing – working with indexed funds – striving to mimic market-like return vs. trying to trump the market, and
Long-term wealth creation – sticking to an investment plan without tinkering with your portfolio. In a nutshell, investing with a robo-advisor is best for long-term investing. To potentially reap the rewards of robo-investing – training your investing brain for long-term success – consider investing with these firms if your investment timeline is at least five (5) years or more.

Robo-advisors in Canada

Here are some of the great firms you can consider working with:

Wealthsimple – arguably the leader in this space. They have Wealthsimple Invest and for more DIY trading you can consider Wealthsimple Trade.
Nest Wealth – is another great wealth management company that seeks to “empower investors to receive access to sophisticated and personalized wealth advice tailored to their unique goals and objectives.” Learn more here.
Justwealth – another solid firm that offers low-cost ETFs for clients to help them meet their desired objectives. Read up about Justwealth and their approach here.
Questwealth – hard to have any robo-advisor list without this company! A subsidiary of Questrade, “get a diversified low-fee portfolio managed by a team of experts so you can get to your goals faster.” We agree! Learn more about Questwealth portfolios here.
CI Direct Investing (formerly WealthBar) – another great robo-advisor who operates in all provinces and also offers some life insurance needs in some as well! You can find CI Direct Investing here.
ModernAdvisor – last but certainly not least in the list – another online investment management firm that offers passive investing options with low management fees. What’s great about them – they are registered as a portfolio manager in every province in Canada, plus the Northwest Territories. In fact, My Own Advisor has a very lucrative partnership with ModernAdvisor you can take advantage of below:

Get help to train your investing brain – with ModernAdvisor.

Try ModernAdvisor risk-free for 30 days with a trial account funded with $1,000 of ModernAdvisor’s money. Yes, you read that correctly. At the end of your trial period you can keep any gains if you open and fund a new ModernAdvisor account.

Summary – Is a Robo-Advisor right for you?

At Cashflows & Portfolios, we believe the more you can automate your savings and investing plan, the more you can get the support you need to manage your goals, the lower your money management fees are over time, largely the wealthier you will become.

With support from a robo-advisor, either one above really, it is our hope you can make better sense of investing as part of your financial plan. The rise of the machines in the form of robo-advisors is only good news / good choices for Canadians. These solutions are a viable alternative to some DIY investing that some folks might not be comfortable with yet nor following a traditional path of dealing with an overpriced mutual fund salesperson.

DIY or not – need any support with your retirement income projections?

Whether you are a DIY investor or not – we know that there is a lot of work to demystify the retirement income puzzle – as you invest on your own, work a bit with a robo-advisor or have other assets under management. We’re working through it in real-time ourselves!

If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more!

If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.

Thanks for your ongoing readership and for sharing this site with others – our site is growing thanks to you!! As an example, a big thanks to Rob Carrick for mentioning our site and services in The Globe and Mail. From Rob:

“TODAY’S FINANCIAL TOOL
Cashflow$ & Portfolios is the name of a website built to help people learn how to reach their long-term financial goals with budget and long-term investing. Brought to you by a pair of veteran personal finance bloggers.”

Yup, that’s us! We appreciate every comment and email and every client interaction.

We look forward to sharing more posts about Robo-Advisors in the future but do ask us any questions in our comments section below!

Disclaimer: Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only.

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4 thoughts on “What is a Robo-Advisor? Are they Right for You?”

Mike
October 7, 2021 at 5:57 pm
I recently signed up with WealthSimple despite being a Questrade client already. I wanted to transfer my kids RESP to a lower fee structure, but Questrade (and many others I found out) do not support the various government grants if paid into an RESP. Questrade’s response was “return the grant to the government and then you can transfer your RESP”. Thanks, but no thanks.
I was hoping to self-manage my investments but WealthSimple doesn’t support the RESP account type in their “Trade” side so now I’m in their robo advisor “Invest” system. Seems to be fairly good, kind of a set-it-and-forget-it system that hopefully protects their money while making some decent market gains. I like the funds they picked.
- CAP
  October 7, 2021 at 9:16 pm
  Thanks for sharing Mike.
  Ha – wrong answer: “Questrade’s response was “return the grant to the government and then you can transfer your RESP.”
  Geez.
  I don’t recall Wealthsimple supporting RESPs yet – primarily TFSAs, RRSPs but they’re all into crypto now! That said, beyond a Robo, we feel investing could not be easier with some all-in-one funds for Canadians.
Mike
October 7, 2021 at 9:30 pm
WealthSimple definitely supports RESPs, I transferred mine over with the grants. It’s just not self-directed on the trade platform but you do have some control over the investments.
- CAP
  October 7, 2021 at 11:04 pm
  Ah, good to know Mike. We haven’t used Wealthsimple for RESPs ourselves but one of our founders (Joe) has and continues to use Questrade – and is very happy with them.
  CAP