Discover the Magic of Robo-Advisors

The global wealth-management industry controls an estimated $89 trillion in assets under management (AUM). Before the global recession of 2008 to 2009, only human beings were responsible for financial planning and asset management. Despite the risk of human error, the industry was not open to digital intervention until after the economic shock of 2008. At that time, fearing that the bearish trend might become a depression, many investors pulled their assets out of the market and waited like everyone else.

This global economic recession was a wake-up call. Investors now started deploying complex computer algorithms and advanced software to help themselves and their clients find the right balance between risk and reward. In 2008, the first robo-advisor, Betterment, was launched. Betterment began handling money for investors in 2010. Since then, robo-advisors have had a great run, although they have not yet excelled their human counterparts in scope of asset management.

In Canada, for example, about 15 robo-advisors control a combined wealth of nearly $8 billion, as opposed to the $422 billion held by Canadian online brokers and the $1.6 trillion invested in mutual funds. Thanks to the ease of using robo-advisors and their greater cost efficiency, digital investing tools have become very popular among young people and new investors who want a piece of the action once reserved for the tech-savviest  investors.

Experts in Canada’s wealth management industry predict that the value of assets managed by robo-advisors could reach $12.3 billion in 2021 and $25.9 billion by 2025.

What Is a Robo-Advisor?

Investment management is a complex field that requires comprehensive knowledge of asset allocation, estate planning, retirement planning, tax services, philanthropy, and accounting, among other financial areas. Wealth managers use information about what particular investors want, including how much risk they are willing to accept, to develop customized investment strategies using diverse financial products and services. Comprehensive financial management requires much time and much specialized knowledge. So investors with substantial net worth often prefer to hire top-notch financial experts rather than try to do everything themselves.

These top-notch human experts don’t come cheap, though. By using a robo-advisor, you can get your portfolio managed digitally with little or no human intervention for considerably lower rates than the rates charged by human financial planners. Automated investing services—robo-advisors—have evolved into highly sophisticated tools for managing risk and planning finances. They are powered by advanced computer algorithms that collect data about your investment goals, analyze the information, provide advice, and even invest automatically for you.

How do Robo-Advisors Work?

The technology behind robo-advisors is the same kind that powers autonomous vehicles. Its core consists of neural networks, sometimes called AI or machine learning. Boosted by such dynamic, self-correcting algorithms, robo-advisors are more than capable of noticing patterns, assessing the state of the stock market, and committing to trades around the risk parameters you have placed upon them.

These determiners are what you would expect them to be, although they vary from one online trading platform to the next:

• How much money do you want to earn on your investment?
• How long would it take to make that money/interest?
• How big of a risk are you willing to take?

After you have completed creating your investor profile, the robo-advisor will develop a collection of stocks — Exchange Traded Funds (ETFs) — so that the risk is distributed across many stocks. Otherwise, robo-advisor or not, you would stand to lose much if a particular stock underperforms with all of your money invested in it.

Lastly, the way robo-advisors generate money for their trading platforms is through management fees. Usually, under 1%, these fees represent the percentage of your total investment. Rarely, they earn money through monthly payments.

Looking for a Robo-advisor? We take a quick look at Canada’s most popular best robo-advisors—comparing the features most important to meeting your financial goals.

Advantages of Robo-Advisors

Extremely low cost of entering the world of high finance, with under 1% annual management fee. Most robo-advisors have even lower fees, between 0.21%–0.49%. In comparison, a human advisor would charge you at least 1%–2%, not to mention more on commission-based accounts.

Constant availability — as long as you have access to the internet, your robo-advisor stands ready to serve.

Low barrier to entry — human advisors rarely take accounts under $100,000 worth of assets. With robo-advisors, you only need to have a fraction of that. For example, Betterment doesn’t have any account minimum.

Disadvantages of Robo-Advisors

You have a limited scope of options as an investor. Instead, robo-advisors decide your ETFs and mutual funds based on your risk profile. Also, bonds and individual stocks are excluded from robo-advisor’s range of operations.

Robo-advisors cannot fully grasp the minutia of your financial affairs and goals as a human advisor could. This may or may not hinder you in your efforts to grow your capital.

How to Choose a Robo-Advisor

A little more than a decade since the first robo-advisor was launched, the field is crammed with hundreds of providers offering diverse financial planning services. To find an robo-advisor that suits your specific investment needs, consider the following criteria.

1. Fees

Like human wealth managers, robo-advisors (or the companies that provide them) charge an annual management fee that is a percentage of the invested assets. The cost of robo-advisors is divided into two parts: a management fee and an expense ratio or average management expense ratio (MER). The management fee is a percentage of the asset invested. For instance, if the fee is 0.20 percent per year, you’ll be charged $2,000 on a balance of $1,000,000. This fee varies depending on the range and quality of the services being offered.

Because the service is largely (if not entirely) automated, robo-advisors are usually cheaper than human wealth managers. The management fees for a robo-advisor tend to range between 0.25 percent and 0.50 percent. Some online robo-advisors provide their services for free; others charge more than .50 percent. Hybrid services that blend robo-advisors and human experts are more expensive.

2. Average MER

All investors know what they must pay in management fees; these fees are advertised. But the average management expense ratio is a is not widely advertised and it is less familiar. The average MER is typically the amount of money a fund pays annually in management fees and other operating expenses like taxes. MER is a percentage of the average daily net assets.

For example, if you are an investor with a portfolio of $100,000 that incurs annual costs of $570, the average MER is 0.57 percent. Unlike the asset management fee, which is deducted from your account on once a month or once a quarter, the average MER is a fee you’ll hardly notice. The reason is that the average MER is deducted proportionally every day by the underlying ETF or fund company. In addition to management fees and the average MER, you may also have to pay for the transactional costs levied by some exchanges and for the services of human experts if and when a robo-advisor is not enough for you.

3. Investment Options

Also important to consider is the type of investment options offered. Although robo-advisors provide similar financial services, some are more specialized than others. Robo-advisors generally help you manage your investment by applying digital strategies informed by your investment preferences, which you report in an online survey. Some firms offer only investment recommendations without also providing the option of automatically investing on your behalf. But other firms can automatically manage your portfolio.

Robo-advisors may offer financial planning and analysis, budgeting, and automated investment, among other complex financial services. You can find the best product for you if you have a good idea of exactly what financial services you need.

4. User-Friendliness

A good robo-advisor is intuitive. You shouldn’t need an in-depth understanding of complex computer algorithms to build a robust portfolio using robo-advisors. Robo-advisors should do almost everything for you, not leave you with a lot to figure out on your own. You also shouldn’t have to struggle to set up an account or to access the services. Operating your robo-advisor should be easy.

Your robo-advisor should also come with impeccable security features so that you don’t end up losing your assets to hackers and other bad guys. And you should be able to reach customer support 24/7 so that you can get real-time help if and when things get a little foggy. Find a product with beginner-friendly features, one that enables you to establish a portfolio with little or no experience as an investor.

The Best Robo-Advisors in Canada

If the recent surge in robo-managed assets is any indication, Canadian investors are placing their confidence in robo-advisors. You have dozens to pick from. Here are the top in Canada.

First Choice: Wealthsimple Invest

Headquartered in Toronto, Wealthsimple Invest is a pioneer and probably the largest robo-advisor firm in Canada. Wealthsimple Invest employs over 250 people, has about 1.5 million members, and controls a combined portfolio of over $8.4 billion. The firm is well-known for its vast portfolio, straightforward pricing, and dedicated team of financial advisors who supplement the robo-advisors.

Wealthsimple branched off into adjacent financial services such as Wealthsimple Trade for individual stocks, and Wealthsimple Cash, a chequing account. As its branding suggests, Wealthsimple is the pinnacle of simplicity. This means it is exceedingly user-friendly and easy to use. It offers three types of ETFs: growth, balances, and conservative, going from the riskiest to the safest. In addition to the most popular ETFs, it also has a socially responsible portfolio for those interested in environmentalism or Islam-aligned investments. To this date, Wealthsimple covers all tax-advantaged Canadian accounts: TFSA, LIRA, RRSP, and RESP.

Wealthsimple Invest diversifies your portfolio with a wide range of ETFs: government bonds, corporate debt, gold, emerging markets, foreign stocks, global stocks, U.S. stocks, and Canadian stocks, among others. Their robo and human experts collaboratively allocate the money and undertake routine rebalancing based on calculated levels of risk and reward. The functions of depositing, reinvesting, and rebalancing have been completely automated, and you can easily track the progress of your investment.

Deposits of up to $100,000 are placed in the basic category. If your investment is in this category, you pay a management fee of 0.5 percent, get a personalized portfolio, and get expert financial advice and other automated financial planning and investment services. If you deposit more than $100,000, the firm charges a lower management fee, 0.4 percent, and you get the premium benefits of the Black package, including a financial planning session. If you deposit of $500,000 or more, in addition to all the features of the Black package, you get holistic financial planning and other benefits.

Wealthsimple has no minimum account deposit, and the fees are relatively low. Over $100,000 it’s 0.4%, and under it is at 0.5%. However, you will be able to invest for zero fees within the first fiscal year for up to $10,000 worth of investments.

Runner-up: RBC InvestEase

RBC InvestEase is a new robo-competitor in Canada that is already making waves. The ease with which investors can use the firm’s robo-advisors, create a portfolio, and track the progress of investments have all contributed to its success. The product was rolled out by the Royal Bank of Canada to accommodate the growing number of its investors who want financial advice from trusted advisors as well as advanced computer algorithms. RBC InvestEase enables investors to track the progress of their portfolios online while expending minimal effort and paying rock-bottom fees.

With the prestige and security that come with being backed by a major bank, RBC InvestEase is giving established rivals a run for their money. It charges competitive fees and accepts initial investments as low as $100. Unlike many of its competitors, RBC InvestEase is very clear about its rates; you won’t encounter any surprise deductions. It charges a management fee of 0.50 percent and ETF MERs between 0.11 percent and 0.22 percent for standard investing portfolios and ETF MERs between 0.18 percent and 0.30 percent for responsible-investing portfolios. RBC InvestEase is a reliable and secure robo-advisor with access to a vast suite of ETFs from Blackrock.

Notable: Questwealth Portfolios

As a part of the largest Canadian online brokerage, Questrade, Questwealth Portfolios was previously known as Portfolio IQ. Combining Questrade and Questwealth, you can relatively seamlessly integrate your stock investments with Questweatlh’s five ETFs. These are rated from aggressive to conservative, representing levels of risk. You will find the most popular ETFs, such as iShares, SPDR, and Wisdom Tree. The most significant advantage Questwealth has to offer is its wide variety of accounts: TFSA, RRSP, LIRA, RESP.

This product is for investors comfortable with an automatic and algorithm-based approach to wealth management. Questwealth Portfolios is arguably the biggest offering in the Canadian market. Your investment is actively managed, with routine adjustments to minimize risk and maximize returns. Your portfolio gets rebalanced in real time to reflect prevailing market conditions. Questwealth provides a user-friendly platform that makes investing easy and enjoyable. The types of investment account include TFSA, LIRA, RIF, RESP, RRSP, Spousal RRSP, Joint Cash, Locked-in RRSP, and LIF. Questwealth also offers tax-loss harvesting, automatic deposits, and socially responsible investing.

Their success has much to do with their low management fees of between 0.20 percent and 0.25 percent and their wide variety of investment options. You can set up a Questwealth Portfolios investment account with a minimum investment of $1,000.

Notable: Invisor

Created by Alliance Insurance & Financial Services Inc., Invisor  is a reliable option for those who want to manage investments and all types of insurance from one platform. This robo-advisor lets you invest across seven ETFs, depending on which level of risk you are willing to accept — Safety as the lowest risk and All Equity representing the highest risk. Interestingly, the latter ETF portfolio has mostly Canadian companies, at 32%, while American stocks are represented in 38% of the ETF.

The overall cost of running Invisor is 0.7%, consisting of a 0.5% annual management fee and 0.2% MER (management expense ratio). This fee is fixed regardless of the investment volume. It has no minimum account deposit, but the account will have to reach $1,000 for deposits to be withdrawable.

Notable: NestWealth

A unique robo-advisor that caters to businesses offering easy investment opportunities for their employees. The Pro variant makes it possible for fund firms to design their robo-advisors, much like you are able to create your own cryptocurrency. People who are covered by employer-sponsored retirements will love NestWealth. The Work and Plus variants make it easy to set up robo-investing for the entire workplace. NestWealth’s selection of ETFs is substantial, from Vanguard and iShares to BMO. Its investment allocation occurs across six types of assets: real estate, bonds, domestic and international equities, emerging markets, and government fixed income.

NestWealth doesn’t charge fees, but relies on fixed monthly fees depending on your investment volume.

Takeaway

In a few scant years, robo-advisors have become a standard form of investment management. Services like automatic rebalancing, customized asset allocation, and tax-loss harvesting, once available to only wealthy clients, are now available to everyone. But as the technology advances, the field has become increasingly crowded, making  it harder for beginners to pick the right robo-advisor. Fortunately, the criteria provided by the experts at MoneyWizard.ca can help simplify the process.

Robo-Advisor FAQ

1. Which robo-advisor in Canada is best for beginners?

Wealthsimple Invest takes the crown for most beginner-friendly robo-advisor in Canada. In a complex field of computer algorithms, Wealthsimple Invest has rolled out a remarkably usable product while charging low fees for small accounts. The firm also offers broad investment options like Halal and socially responsible investments. Almost everything on Wealthsimple is automated, so that you can do a lot regardless of your level of investment knowledge. You can always contact the customer support team if you get lost.

2. Are robo-advisors safe?

If there’s anything the Bernie Madoff saga taught us, it’s that it is perfectly appropriate to question the safety of the organizations we do business with. Although robo-advisors have yet to be tested in extremely bearish markets, they have done pretty well in the decade or so during which they have operated so far, and most robo-advisors are backed by trusted traditional banks and brokerages with long histories. So we are justified in using robo-advisors with some confidence. Even so, we should also exercise a reasonable amount of caution. These waters are only partly charted.

How much money can you make with robo-advisors?

Approximately equal the amount of average investors with diversified portfolios.

Do robo-advisors beat the market?

No more likely than a human would beat the market.

How do robo-advisors make money?

Through annual or monthly account fees. They are almost always under 0.8%. Additionally, robo-advisors earn money through adjacent transactional services — expedited deposits and withdrawals.