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Financial Friday #135: Get Invested the Easy Way!
What is a robo-advisor? A robo-advisor is an automated, online financial advisor. Users get started by simply answering an online questionnaire or survey about their investing preferences and risk tolerance. That data is then used to select from portfolios of exchange-traded funds (ETFs) which the robo-advisor continuously manages to keep in line with the pre-determined risk profile — buying and selling funds as required and re-investing dividends. If you don’t want to jump into DIY investing but still want the low fees and freedom of foregoing a living, breathing financial advisor, a robo-advisor may be the perfect investing option for you.
Are they any good? If you know very little about investing and are strapped for time or just don’t want to learn more, a robo-advisor is a good choice. You give up flexibility in what you invest in (no stock or fund picking), but you can be assured that your portfolio is being managed to mirror your preferences while you go out about your other business — it is sometimes called “set and forget” investing. However, like any investment, you should be regularly monitoring your returns and making adjustments as your risk tolerance/life situation changes.
We can’t tell you whether a financial advisor or a self-directed (DIY) investing approach will yield better returns than a robo advisor – it may or may not! Our view is that it is hard for anyone (professional or not) to consistently beat the market. Passive investing (the robo advisor does all the work) with low-cost ETFs is a good strategy and robo-advisors make pursuing that strategy convenient and easy with a simple, low-cost fee structure.
What are the fees? One of the major advantages of a robo-advisors is that they don't use a lot of human management and therefore have relatively low fees. Their fees are also very transparent. They charge a fee to manage your portfolio and it usually ranges between 0.30% and 0.60%. In addition, there is a built-in management expense ratio (MER) in the ETFs of around 0.10% to 0.30%.
At the end of the day, you may be paying around 0.7%. This is probably going to save you a bundle compared to the other options, especially when you consider that many mutual funds still have MER fees in excess of 2%. You should review your investments annually to ensure any above-average fees are justified by above-average returns or other services/features that you value.
Which robo-advisor is best for me? For a lot of us looking to simply invest our RRSP or TFSA, fees should be a prime consideration. Some institutions have a minimum account size so that may be a factor if you don’t have a lot to get started. Others may offer more personalized service (telephone or live chat support) or a larger selection of portfolios including socially or environmentally focused options. The functions and features of the mobile app as well as how it integrates with other financial services is also something to consider.
Many financial institutions offering robo-advisors will pay transfer fees and help facilitate the switch from your existing investment account. Please be aware that there may be considerable fees or penalties when selling mutual funds and switching to a robo-advisor — consult with your advisor.