Robo advisors are the investment tool of tech-savvy investors. Can they work for you too?
Updated 11- 09- 2023
To the investor who is unaware, the term “robo-advisor” may sound like some new-fangled idea. The truth is, a form of robo-advisor was already in use as far back as the early 2000s. Even at that time, some financial advisors and managers in the US employed robo-advisor technology to manage their assets.
It was in late 2008 that a robo-advisor was developed for use by the public at large. But now that it’s 2023, the Canadian financial landscape is chock-full of these automated financial advisors, with over 100 robo-advisors managing assets and portfolios in the billions of dollars.
Given their popularity, is this a technology that investors can and should use? In this article, Wealth Professional lists some of the best robo-advisors in the market and hopes to provide some answers.
The word “robo” may imply that this would be an actual robot with some sort of physical body replete with a head, torso, arms, and legs, but this is not the case.
Robo-advisors are software. These are digital platforms that use algorithms to build and manage investment portfolios (ETF portfolios with stocks, bonds, and real assets) by optimizing and automating passive indexing strategies. These strategies are based on what’s known by investors as Modern Portfolio Theory or MPT.
What was the first robo-advisor?
The first robo-advisor was Betterment, the brainchild of 29-year-old Jon Stein, created in August 2008. The main inspiration for Betterment was to make it more convenient, straightforward, and simpler for people to invest even in small amounts.
Betterment’s creation was also partly inspired by the global financial crisis of that year, which would then be recorded as one of the six biggest market crashes in history. Without going into too much detail, the 2008 financial crisis was so impactful that even Lehman Brothers, once deemed “too big to fail”, filed for bankruptcy.
How does a robo-advisor work?
A robo works by automatically configuring your investment portfolio. Robo-advisors typically build your portfolio with exchange-traded funds (ETFs) and index funds. So, instead of having you do all the research on which stocks and bonds to buy or sell, the robo buys and sells ETFs based on your data.
The process usually starts when you open an account with a robo-advisor and are presented with a questionnaire. From your answers, the robo determines your financial goals, risk tolerance, and investing preferences, then assembles portfolios based on this data. The robo will usually recommend 5 to 10 choices for your portfolios, and they will have risk tolerances ranging from conservative to aggressive.
While chosen portfolios are based on provided data, you will usually be given the option to override those choices and make some of your own.
As for the fees, you will have to pay the management expense ratios (MERs) on those funds, as well as the robo’s management fee. The robo’s fees are often minimal compared to paying a human financial advisor.
Another noteworthy feature of a robo-advisor is its automatic rebalancing. This feature enables them to take advantage of or account for changes in the market and rebalance your portfolio’s asset mix as needed.
For instance, if you have a portfolio composed of 60% equities and 40% bonds and there’s an increase in equities, the robo will automatically adjust your portfolio to fit your risk profile.
Here’s a video to give more insight into the nature of robo-advisors. While robo-advisors aren't actual robots, they’re also not a form of Artificial Intelligence (AI). Associate Portfolio Manager Ben Felix of PWL Capital offers his two cents (and more) about robo-advisors here:
There are hundreds of these robo-advisors available, so how should Canadian investors choose a robo-advisor? Go with the best possible choices. Here are the 5 best robo-advisors in Canada:
Minimum Investment: None for Basic plan
Management Fees: 0.5% for Basic plan, 0.4% for Black or Generation plans
For Canadian investors, Wealthsimple is usually the first option to come up when looking for the best robo-advisors. After all, it was the first robo-advisor in Canada, and remains a favourite among investors here. This is an extremely user-friendly investment tool with minimal human interference or interaction, making it perfect for passive investors.
With this robo, you can expect your wealth to build up over time. Wealthsimple configures a suitable basket of funds for its customers from 8 to 10 ETFs. The robo asks customers to choose from preset conservative, balanced, or growth-oriented portfolios.
Investors can choose to have their investments go to a Registered Retirement Savings Plan or RRSP, Tax-Free Savings Account (TFSA) or other registered accounts.
Wealthsimple offers three plans for customers to choose from:
- Basic – includes features such as expert advice, auto-rebalancing, and auto-deposits
- Black – requires a minimum deposit of $100,000 and includes financial planning sessions with experts, tax-loss harvesting and tax-efficient funds
- Generation – requires a minimum deposit of $500,000 and includes all the Black account’s features along with personalized financial reports and an expert team of advisors
2. BMO SmartFolio
Minimum Investment: $1000
0.7% for first $100,000
0.6% for next $150,000
0.5% for next $250,000
0.4% for investments above $500,000
Even the Big Six Banks of Canada have gotten into the robo-advisor space, but only Bank of Montreal made our best robo-advisor list. The main reason why BMO’s robo made this list is because it’s the first of the Big Six to offer this service. BMO also offers a hybrid service that allows investors to meet advisors via online chat, phone, or in person, along with automated rebalancing for your portfolio.
To complement the service, BMO SmartFolio also employs a team of five portfolio managers and eight credited financial analysts. This team focuses on ETFs that provide global and diversified exposure, and it’s monitored daily.
This more active approach means that BMO SmartFolio charges higher fees. Even though accounts can be lumped into household accounts to reduce fees and pricing, it can still be relatively costly. Apart from BMO's fees, there are ETF fees ranging from 0.2% and 0.35%.
Minimum Investment: $5,000 / no minimum for RESP
$2.50/month for RESP
plus 0.5% annual fee and average 0.25% ETF fee
This robo is best for investors who still need the advice of a portfolio manager. JustWealth intentionally operates in this way, being not completely automated. The company likens themselves as more personal, with a hybrid approach that combines human advisors to service clients in tandem with automated investing options.
JustWealth can be a great option for investors who may feel apprehensive about their finances being run 100% by algorithms. JustWealth’s main selling point is that they offer clients 70 different portfolios, which include categories like global growth, Canadian growth, income, educational target dates, and USD portfolios.
Since JustWealth has investment areas dedicated to education, some investors think that this is the best option for those who need to fund a Registered Education Savings Plan (RESP). With this setup, clients can simply choose their target date and investment strategy, then leave Justwealth to do the rest. The only drawbacks are the $5,000 minimum investment, and that it can cost $50 to $150 to withdraw cash.
Traditional or robo-advisor - which is right for you?https://t.co/g9sf4TwBl2— Justwealth (@justwealth) October 19, 2022
4. CI Direct Investing
Minimum Investment: $1,000
0.6% for the first $150,000
0.4% for the next $350,000
0.35% for investments above $500,000
CI Direct Investing is part of CI Financial, which used to be WealthBar. This is yet another robo service that uses a hybrid approach. They offer financial advice from experts alongside the passive investing algorithm.
A unique take on this service is that CI Investing allows clients to choose a private investment portfolio for even more asset class diversification. Through this feature, investors can further reduce volatility and risk over time.
Along with its exceptional track record, the company has extensive investment expertise that spans over 40 years. The only possible downside to investing in this company is the fees, which can be higher than some other robo-advisors. However, these fees are reduced when more money is invested. Plus, all it takes to start investing with them is a mere $1,000. Investors shouldn’t miss out on reaping the full benefits of CI Investing’s expertise and robo services at that amount.
5. RBC InvestEase
Minimum Investment: None
Management Fees: 0.5% portfolio fee plus appropriate MER
RBC InvestEase is the best robo-advisor for beginning investors and investors who want to keep things simple.
As another of the robos offered by one of the Big Six, this service gives a degree of permanence and stability that few to no startup robos can offer. This is also one of the most straightforward options for investors, since it’s focused on the main benefits of low-cost, passive investing.
Investors in this robo-advisor can choose from two main types of portfolios: Standard and Responsible Investing (RI).
Under each type, there are five subcategories for a range of risk tolerances. Both portfolios now hold a selection of 14 iShares ETFs, ever since RBC partnered with iShares in 2019. Their average MER is at 0.13%, so RBC InvestEase has combined fees at the lower end of the range, at about 0.63% (0.5% portfolio fee and MER) of the portfolio each year.
This makes RBC InvestEase a very easy, low-cost way to invest. And with its across-the-board fee of 0.5%, this simplifies computing for actual returns.
RBC has no minimum account size and will start investing once the balance reaches just $100, making it ideal for investors just starting out.
Michael Williams, CFA, RBC InvestEase, Director, Portfolio Advice contributed an article "Robo - Advisors are Humans too"— Banking CIO Outlook (@BankingCIO) June 26, 2023
Read More: https://t.co/XmaHf0yKRB#advisors #investments #financial #WealthManagement pic.twitter.com/5rFTHpsCph
Unfortunately, they don’t. Robos don’t typically work to “beat the market” since they’re tasked with choosing a basket of ETFs that are aligned with their customers’ data. As robos mostly deal in ETFs, their main goal is to keep in step with the markets. This, apart from considering their customers’ risk tolerance, goals, and investment preferences.
Most anyone who’s looked into online investing in Canada will tell you that Wealthsimple is usually one of the first robos to come up. In fact, Wealthsimple has remained one of the top choices among robo-advisors for some years now.
Yes, they do! Recent studies have revealed that almost 7 out of 10 Millennials who are millionaires have some money invested in robos.
What’s more, almost 20% of Gen Z and Millennial households who are more familiar with investing hold their investments in robos, as opposed to only 13% and 2% for Gen X and Boomer households respectively.
Now that you have more information about the best robo-advisors in Canada, would you consider investing in them? Would you use robo-advisors exclusively or in tandem with human advisors? Let us know in the comments!