You may have heard of "Robo-advisors" as they are a new and fast-growing player in the investment industry. In the U.S. they are already changing the industry and they have the potential to be a game changer in Canada.
Below is a brief description on what robo-advisors are and how they may be a great option for Canadians who are tired of paying high fees for their investments (mutual funds).
Robo-advisors are an inexpensive way to buy a balanced and diversified portfolio of Index ETFs. ETFs are similar to mutual funds, but they trade on the stock exchange. If you are unfamiliar with ETFs, go to my article "The ETF: A giant box of assorted LEGO". to learn how they can be the building blocks to your portfolio.
The problem of buying ETFs on your own and creating your own low cost passive portfolio (Model Portfolio) is that the initial set up and re-balancing can be a bit daunting. It consists of opening a discount brokerage account, learning how to buy ETFs, maintaining the asset allocation with a spreadsheet, and re-balancing a few times a year. Robo-advisors are able to take care of the buying, re-balancing, and portfolio maintenance for you on a regular basis. They use algorithms to figure out when to re-balance your portfolio so you never have to worry about it. One major reason for having a portfolio that re-balances itself is to take the emotion out of investing. Never again do you have to rely on feelings or external influences to make investing decisions. No FOMO, no hindsight or regret.
How much does this service cost you ask? Using Wealthsimple as an example, they charge 0.5% for accounts under $100,000. There is also a 0.2% on top of that which includes the fees of the underlying ETFs that they buy. This is significantly less expensive than Canadian mutual funds that typically charge between 2% - 3% annual management fees (MER).
Aside from the benefits of having a low cost portfolio that is re-balanced automatically, here are a few other benefits:
- Pre-Authorized Payment Plans: You can deposit money in smaller amounts or use pre-authorized payment plans. This is difficult to do when you build your own portfolio of ETFs due to trading fees from your discount brokerage account.
- No Trading Fees: Building on the last point, when a robo-advisor buys or sells ETFs on your behalf, they do not charge additional trading fees. At discount brokerages, the trading fees to buy and sell ETFs are around $10 per trade.
- Dividend Re-investments: As robo-advisors take care of re-balancing for you, they will re-invest any dividends that are given by the underlying ETFs. It's basically like having a DRIP (Dividend Re-investing Plan).