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Investing With a Robo-Advisor

The hands-off and affordable way to get invested

You've got some cash sitting around. You want to get this money working for you and earning something - but it doesn’t seem easy. You're not sure where to go, who to talk to, and who you can trust. It all feels like a giant hassle so you procrastinate and your money continues to sit in your chequing account being eroded by inflation.

Procrastinate no more! This series of blog posts will help you figure out how to get your money invested using one of four ways: using a bank branch, using a financial advisor, doing it yourself, or using a robo-advisor.

Each of the methods for getting your money invested has its pros and cons, and none is superior to the others. How you get invested depends on what you need and want; it’s a trade-off between how much effort you want to put in and how much you are willing to pay to have someone else take the task off your plate.

While a financial advisor will provide you with the most help and advice, it can be expensive. Doing it yourself is cheap, but the work is done 100% by you. A bank branch is the quick-and-easy way, but offer little advice and will cost you.

A robo-advisor is sort of a happy medium on work required/fees paid continuum. You’ll need to do a little work getting set up with a robo-advisor, but after that it does the work of choosing which investments you own and investing for you.

In my last three blog posts, I reviewed the pros and cons of investing using a bank branch, a financial advisor and an online broker. This post lays out the pros and cons of using a robo-advisor.

How does a robo-advisor work?

The term “robo” just means that a software program is doing the work that a human financial advisor would normally do. The program decides on the right allocation of investments based on a series of questions you’ve answered, questions about how long you plan on investing the money for, how you feel about the value of your investments going up and down, and your familiarity with investing. These questions assess your risk tolerance – defined as how much volatility in the value of your investment you can tolerate. With this risk tolerance in hand, the robo-advisor picks a portfolio for you. Within this portfolio is 5-7 exchange-traded funds. These funds were chosen by a human and programmed into the software. So don’t worry – it’s not all “robo”!

Once the portfolio is chosen, the robo-advisor invests your money for you. All you have to do is deposit it into the account – there’s no trading involved and you don’t need to buy individual investments. In addition, the robo-advisor makes sure that the amount you have invested in bonds versus stocks stays about the same as markets move up and down, removing another function that a do-it-yourself investor would normally have to do.

Pros and cons

So you can see some of the pros of using a robo-advisor: it’s easy and it’s hands-off. It’s also unemotional. When I say “unemotional”, what I mean is that there is no human emotion directing how you are investing. And when human emotion gets involved, investing mistakes happen. Ego, over-confidence, or the desire to tinker can all derail investment returns. A robo-advisor has no ego and simply invests according to a formula based on historic data.

This all sounds great, right? Well, it is! But as with the other methods of investing, using a robo-advisor isn’t perfect. There are three main drawbacks of using a robo-advisor: you can’t customize it, you will get limited advice, and it’s more expensive than doing it yourself.

Sometimes a portfolio needs a little customization. You might need to hold some cash in your TFSA for a trip you’re taking next year or you might want to earn some dividend income. A robo-advisor doesn’t adjust for these needs – you’ll have to have a second account that you manage yourself to make these customized choices.

In terms of advice, you won’t get the personalized suggestions and guidance that a financial advisor can give you. A robo-advisor can’t tell you the optimal amount to contribute to your RRSP or whether you should withdraw more than the minimum from your RRIF in retirement.

And lastly, fees. A robo-advisor will cost you around 0.5% to 0.6% per year. This is lower than investing in bank mutual funds or using a financial advisor, but is higher than a do-it-yourself ETF portfolio. Is paying a little more worth the ease and simplicity of a robo-advisor? For those who want to do no work or maintenance once the account is set up, yes, it likely is.

How do I get started with a robo-advisor?

Probably the most well-known robo-advisor in Canada is WealthSimple but there are other options to choose from. Questrade Portfolios, RBC Invest East, CI Direct, and Nest Wealth are example of other robo-advisors. You can read more about the choices in this MoneySense article. To get going, you’ll need to open an account, transfer money in, and fill out a questionnaire. That’s pretty much it. After that, you can log in periodically to see how your investments are doing.

If you’re trying to decide between the various options to get invested, you’ll need to decide how much effort you’re willing to put in, how much personal advice you want, and how much you’re willing to pay.

Have a look at the graphic to see what kind of investor you are and which method of getting invested might be best for you. As I say, each method has its pros and cons - at the end of the day, what really matters is that you get invested one way or another.

With so many ways to get invested, there’s no excuse to procrastinate. Money sitting in a chequing account is earning nothing; taking a little time to figure out how to get invested in well worth the effort


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