Robo-advisor

A robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice. They usually do not get involved in more personal aspects of wealth management, such as tax planning, retirement planning or estate planning.

Typically the investor fills an online questionnaire to assess his/her risk tolerance and objectives. A phone call or live chat may also occur. An exchange-traded funds (ETF) portfolio will then be recommended accordingly, out of five to ten standard choices ranging from conservative (more bonds) to aggressive (more stocks). The ETF portfolio will be automatically maintained by the robo-advisor.

Some robo-advisors have a traditional passive investing approach, using broad-market ETFs with low fees and no market timing. Others have a more active approach, for example using so-called “smart beta” ETFs or variable asset allocations.

While robo-advisors were initially marketed to millennials, in 2017 the average client was about 44 years old.

Regulatory model

Robo-advisors operating in Canada are typically licenced as portfolio managers.

There is no "online advice" exemption from the normal conditions of registration for a portfolio manager (PM). The registration and conduct requirements set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) are "technology neutral". The rules are the same if a PM operates under the traditional model of interacting with clients face-to-face and if a PM uses an online platform. Often, model portfolios are created using algorithmic software although, again, a registered advising representatives (AR) has responsibility for the suitability of each client’s investments.

An online questionnaire and interface facilitates much of the "know your client" process, but a live, licensed portfolio manager must review this information and the recommended portfolio to ensure suitability. This review has to be done through what the Canadian Securities Administrators (CSA) calls a "meaningful discussion" between a licensed portfolio manager and each client.

Costs

As of December 2020, on the first $100k invested, yearly fees range from 0.5% to 0.7%, including the costs of the underlying ETFs, at six of the eight robos reviewed by MoneySense.

For comparison, the MERs for Asset allocation ETFs -- which offer essentially the same convenience, and are purely passive -- are approximately half of this.

Pros

• Cheaper than traditional investment advisors using mutual funds for moderate-sized portfolios.
• No work for the investor, no knowledge required.
• Less risk of behavioral mistakes.
• Fees are transparent.

Cons

• Significantly more expensive than buying the very same ETFs, or another model portfolio of low-cost ETFs, at a discount broker yourself and rebalancing occasionally.
• Also significantly more expensive than buying a single asset allocation ETF, which requires no rebalancing
• There may be significant changes in asset allocation over time within the portfolios: in one example, US stocks went from 15% to 32.5% over a 2.5 year period, without the investor having any control over it
• Portfolio recommendations may not take into account factors such as job type or stability, workplace pensions, etc.
• If the robo-advisor uses an active approach, results may be better or worse than a passive approach: the active strategies add uncertainty.
• Some of the ETFs used by robo-advisors have high fees and/or have a short track record.
• Some robo-advisors are now promoting active stock trading and trading in highly volatile cryptocurrencies, which go completely against the original "good-for-you" philosophy

Alternatives

• An investor willing to pay 1% per year for a hands-off diversified portfolio should also consider one fund porfolios, including relatively low-cost balanced funds.

Doing it yourself

The steps performed by the robo-advisor in exchange of what are still high fees are not rocket science, and are not as complex or time-consuming as you may think. Investors in search of much lower annual costs, and who can stay the course, will therefore opt for the DIY route, with index funds, a small number of ETFs (simple index portfolios) or asset allocation ETFs.

• Risk tolerance questionnaires are available freely online.
• Model portfolios can be found in simple index portfolios or at Canadian Couch Potato.
• For frequent purchases, including automated regular contributions, index funds are the easiest route and do not require a brokerage account. The example presented in four index funds has a weighted average cost of 0.44% as of December 2016.
• For larger portfolios and infrequent purchases, ETFs have lower costs: the example of three ETFs has an average MER of 0.15%, to which trading commissions must be added.
• If you have selected your asset allocation but are intimidated by the vast array of ETFs available, see the very low-cost broad market cap-weighted ETFs listed in the following pages: Canadian bonds, Canadian equities, US equities and International equities.
• If you have never used a discount brokerage account, see the helpful videos listed at How to build an ETF portfolio at...
• If you are concerned about the details of rebalancing, see the detailed examples in Strategies for rebalancing.
• If the world stock markets are down quite a bit and you are panicking, before you sell everything, get moral support for free from the Financial Wisdom Forum!

See also

• Getting started
• Portfolio design and construction

Further reading

• Financial Wisdom Forum topic: "Robo-advisors"
• Financial Wisdom Forum topic: "Robot Wealth Managers"

External links

An actual experience with a Canadian robo-advisor, from Aman Raina at the Financial Independence Hub:

• Robo Advisors, A Personal Experience Part 1: Getting Started, February 23, 2015,
• Putting a Robo-Adviser to the Test, Part 2 (a), March 17, 2015.
• Putting a ROBO adviser to the test, Part 2 (b), March 18, 2015.
• Aman Raina’s Robo portfolio — 2 years later, February 24, 2017
• Aman Raina’s 3-year review of his Robo Advisor portfolio, March 2, 2018: "In the three years I’ve had the portfolio, my ROBO has made changes in the asset allocation three times and has turned over 75% of the portfolio. So if you expect a “set-it and forge it” strategy, you won’t find it here"
• Aman Raina’s 4-year Robo Advisor review, March 7, 2019: "The US portion now has 2 ETFs that invest in the same basket of US stocks, which I continue to look at in bewilderment."
• Aman Raina’s mid-year ROBO advisor review, November 18, 2019: "This marks the 3rd significant change in my portfolio’s asset allocation in the 4 1/2 years I’ve had the portfolio. I think we can clearly say this portfolio has not been passively managed."
• Aman Raina’s 5-year Robo advisor review, March 27, 2020

Robo reviews

• Michael McCullough (February 3, 2023). "A guide to the best robo-advisors in Canada for 2023". MoneySense.
• Rob Carrick (November 15, 2022). "The Globe and Mail's 2022 Robo-Adviser Guide". The Globe and Mail.
• Rob Carrick (November 19, 2020). "Robo-advisers laid bare – how they compare on fees, returns and investing approach". The Globe and Mail.