Robo Advisors
Robo Advisors have recently flipped the world of Mutual Funds upside down, and for good reason! A Robo Advisor is simply an online service that invests your money on your behalf, similar to the service that you receive from when buying mutual funds from a human financial advisor, but at a fraction of the cost.
A Robo Advisor is not actually a robot; it’s an online service that uses software (a.k.a. a lot of complicated math) to help determine an investing strategy that’s best for you. Unlike Mutual Funds, which actively manage and try (though often fail) to beat the market, Robo Advisors use a passive investing strategy (usually buying ETFs), which is much more cost effective.
People who invest through Robo Advisors get the benefits of having all of their investments managed on their behalf, while benefiting from lower fees of passive investing. In fact, the base technology that is used to help human financial advisors make investment decisions is the same technology used by Robo Advisors.
In terms of fees, Robo Advisors tend to charge a Management Fees of 0.5-0.7%. That may not seem much lower than the 1-2% fees for Mutual Funds, but over a long period of time it can really add up. Let’s say you invest $500/month that grows on average at 8% each year, and you do this for 35 years. A Mutual Fund with a 2% fee would reach $712,300, while a Robo Advisor with a 0.5% fee would reach $1,015,400. I don’t know about you, but I would definitely prefer having an extra $400,000+ for my retirement!
The very first Robo Advisor, Betterment, was launched back in 2008 with the goal of making investing simple through an online interface. The founders of the company faced a lot of skepticism from investors, and rightfully so. Betterment claimed their service will “tell you how much to invest and manage your money for you, all throughout your life, in a way that gives you better outcomes”. Many investors challenged their idea, assuming that it was too simple and that it might feel more like a toy than a trustworthy service to manage their money.
However, Betterment proved them wrong. They developed a groundbreaking business model that has created a brand new sector for financial services. There are now dozens of independent Robo Advisors, available across the globe, like Betterment, Wealthsimple, and Questrade.
When you invest through a Robo Advisor, you’ll create an account and answer a number of questions that help the service understand your investment goals. Based on your answers, the service will select a portfolio (a selection of ETFs) for you with an appropriate risk level. You can also switch to a different portfolio at any time if your situation changes. Many Robo Advisors will also provide guidance on how much money you need to invest to reach any goals that you’ve set during this setup process.
Setting up an account with a Robo Advisor can usually be done in less than 10 minutes. Once you’re set up, you can either choose to have your money automatically transferred into the account from your bank every month (this makes it completely hands-off) or you can manually do this each month (this usually takes 30-seconds). When you deposit money into a Robo Advisor, it will invest the money for you. As soon as the money arrives in the account, the Robo Advisor will begin purchasing investments for you.
Another huge benefit of using a Robo Advisor is that it will take care of switching up the investments in your portfolio as the world changes. For example, if in the future the Canadian energy industry begins to struggle, the Robo Advisor will rebalance the investments in your portfolio to make sure your money is in places where it is expected to grow. This takes all of the work out of investing for you.
Pros:
Completely hands-free: you simply transfer money into the account and it’s invested on your behalf
You don’t need to do anything if the markets go up or down- the Robo Advisor takes cares of adjusting the investments inside as the economy and the world changes
Can be set up quickly and easily online
Since ETFs invest in so many different stocks and bonds, this diversity of the investments in general makes them less risky than purchasing individual stocks/bonds
Very low Management Fees, meaning more money for you!
No hidden fees- most Robo Advisors only charge the Management Fee, and if they do have other fees they tend to be very transparent about them
Similar performance and risk-level to higher-cost Mutual Funds
Cons:
Robo Advisors typically have a set number of portfolios that you can choose from, with limited or no ability to customize what your money is invested in (ex. Cannot request more of your money be invested in the technology industry)
Everything is done online so you aren’t working directly with a human advisor - if you have questions you’ll need to reach out to their customer support team through a chat or through the phone (which may actually be a pro if you’re an introvert like us)
