The Ultimate Guide To Robo Advisors - Part 2

This is the second of a two-part series. Part 1 was published in the February 2017 edition of Canadian MoneySaver.

Just How Safe Are Robo Advisors Anyway??

Are robo advisors safe in the same way your Uncle Don had a “super safe” investment in an Alpaca farm a few years ago? (You’re still getting your shareholder payments in sheared wool each year, right?). No – they are as safe as pretty much any other bank or investment firm out there. Here’s why I feel comfortable saying that:

• All robo advisors are a bit like storefronts. The “warehouse” or “back office” is a third party that is a member of the Canadian Investor Protection Fund (CIPF). If you’re not sure what the CIPF is, here is what their website has to say: “Investment dealer insolvency doesn’t happen very often. In fact, since CPIF’s inception in 1969 there have been only 20 Member insolvencies. CIPF has paid claims and/or related expenses of $43 million, net of recoveries, and no eligible customers have suffered a loss of property.
• Even if the worst-case scenario was to occur and bankruptcy ensued, robos’ clients’ money is kept separately from the companies’ own balance sheet. Even before it got to that point however, it is likely another of Canada’s robo advisors or major financial entities would buy a distressed robo company just to get their client accounts – thus moving your money to a new company or “storefront” but ultimately not losing a penny.
• All the robos that I looked into are very transparent and specific on their websites when it comes to addressing precisely where your money is held and why you are protected as a Canadian consumer.
• The robo advisor model has been used around the world for several years now. For example, the American robo Betterment has been around since 2008, and now has over $3 billion in assets under management. These guys are going to be around for the long haul, and they are NOT “still working the kinks out”. These models are tested and refined – and will continue to get better.
• Every robo advisor that I’ve looked it is registered as a portfolio manager. This title means that they have fiduciary responsibility to their clients. This legal definition is key when it comes to making sure you get the best advice for your personal situation.

What Is This Robot Investing My Money In?

1. There is no robot investing your money.
2. There is a pre-agreed upon way to invest your money that you will choose and then a person, in tandem with a computer will carry out on your behalf.

Basically, all robo advisors have done is take the couch potato investing theories that geeky personal finance writers like yours truly have been raving about for years – and make them much easier to invest in. Naturally, they won’t offer this service for free, so there is a relatively small fee attached.

Each robo advisor will offer this service a bit differently and charge a slightly different price to do it (more on that in a second), but at their root, each robo seeks to take your investment dollars, learn about your goals, and then recommend a basic index ETF portfolio that each of your investment dollars will be split into going forward.

Each of the major robo advisors will make sure that some of your money is put into Canadian stock market ETFs, International stock market ETFs, and more conservative investments such as bonds and GICs. Each will do this in a unique way, but without getting too nerdy on the details, what you really need to know is that there is a ton of proof, science, and simplicity behind the financial management strategies that will be applied to your money. For what it’s worth, I endorse this approach wholeheartedly.

Why Are Robo Advisors Such A Good Deal?

When compared to the way most Canadians still choose to manage their money, robo advisors are a fantastic deal. What it really comes down to is how much of your investments are you willing to sacrifice each year in return for financial advice and help getting money from your paycheque and into an investing portfolio? Robo advisors each have their own way of charging for their services. Some charge a flat rate, while others charge a certain percentage, and a couple charge a combination of the two. What all the robos have in common is that they are simply a much cheaper way to invest than the traditional bank mutual funds. The larger your nest egg grows the truer this is.

I personally believe that both younger and older Canadians who are comfortable in an online-only environment will find the robo advisor platforms much easier to interact with than those of the big banks and investment companies. That is their sole purpose after all. I cannot emphasize enough how intuitive and aesthetically pleasing the leading robo advisors’ websites are. I think it’s likely that big banks will soon follow BMO’s lead and put forward their own robo advising options that copy the best parts of what’s out there (or buy out some of the current leaders).

Overall, because I prefer the flexibility of working with an online platform as opposed to face-to-face talks, I would actually pay more for an online-only model. The fact that my money is invested much more effectively than using big-bank mutual fund fees, and I see a major cut on fees, means that this isn’t even a close comparison for me.

If Robo Advisors Are Such A Great Deal, Why Do You Still DIY?

After raving about what a good deal robo advisors are, you might do a double take when I say that I don’t plan on using them. I will continue to invest using the DIY couch potato method that we’ve written about extensively on YoungandThrifty.ca.

That being said, I have now started recommending the robo advisor route for 80% or so of my friends.

Why is it good enough for my friends but not for me? It’s all a matter of value and eliminating obstacles that get in the way of consistently turning part of your bi-weekly or monthly cheque into an investment portfolio.

Anyone can build the exact same investing portfolio for themselves that they can get through a robo advisor – most of the robos even go so far as to show you the exact portfolio options available on their website or during the first consultation you have with them! There is very little that is new or original when it comes to the investing side of the robo advisor operation. One thing that I really admire about all the major robo advisors in Canada is that they have been entirely up-front with me in admitting that you can implement a DIY index ETF portfolio for significantly cheaper than what it will cost you to do something similar through them. Personally, I feel very comfortable setting up my own online discount brokerage account and managing my portfolio (and it looks pretty much identical to the ones that would be recommended to me through the robo advising services). I’m kind of a nerd and not exactly the target audience for these companies.

So, to recap so far, DIY index investing is cheaper than using a robo advisor. I still maintain that I don’t think it is overly difficult to DIY using a basic portfolio of index ETFs. I would compare the overall difficulty level to grade 9/10 math.

Is DIY Or A Robo A Better Fit For You?

Ultimately, how I choose to manage my investments probably doesn’t matter much to you – what should matter is which options will get you the best results going forward. Here’s a few quick questions to help you decide how to invest your money (assuming you have come to the same conclusions that I have and determined stock picking is probably not your cup of tea and that mutual funds are generally a terrible idea).

1. Do you want to do your own Gr.9/10 math? Please don’t answer this question based on pride. Seriously ask yourself if you want to make this commitment 4-12 times a year when you rebalance your investing portfolio. If you don’t, then go with a robo. (I’m fine with Gr. 9/10 math, but don’t ask me to do elementary-level lessons in learning any foreign language.)
2. Do you want to do a few hours of reading and paperwork to fully understand index investing and how to implement it? If you don’t, then go with a robo.
3. If a strategy is easier for you, will it make a large difference in how successfully you implement and stick with it? Think about going to the gym. If your gym was 15 minutes closer to your house, would you be slightly more likely or much more likely to use it? If convenience and ease of use are major factors for you, then go with a robo.
4. If you’re just not super confident when it comes to investing terms such as ETF, RRSP, TFSA, etc., and think it would be really nice to have someone to email or chat online with from time to time, then go with a robo.

Each of these four questions might seem sort of “small potatoes” to you, but truthfully, they’re not. Making investing easier is worth A LOT of value to the majority of Canadians. Sure, it will probably cost you somewhere around 0.5% to 0.7% of your portfolio annually, but if it makes the difference between you investing $5,000, and not getting started at all, that is a very minor concern. Plus, don’t forget that you’re still way ahead of traditional financial advice/investing models.

If there’s a one thing I’ve learned while trying to talk to Canadians about money over the last few years, it’s that most of us don’t really want to manage their own investments. We want to “set it and forget it” and then re-visit the idea again a few years before we retire. This is why workplace pensions are so sought after. I’ve also noticed that many Canadians get a burst of energy, read a bunch of stuff, and then fail to follow through and execute the investing strategy they’ve read so much about. Or they get bogged down in stuff like specific ETF choices and then they start thinking that maybe picking a few stocks isn’t such a bad idea, etc. For this majority of Canadians, the robo advisor model is a perfect fit.

If you want to see our comparison of Canada’s robo advisors and take advantage of some exclusive discounts, head to: http://youngandthrifty.ca/complete-guide-to-canadas-robo-advisors/.

Kyle Prevost is a business teacher and personal finance writer helping people save and invest over at MyUniversityMoney.com and YoungandThrifty.ca. His co-authored book, More Money for Beer and Textbooks, is available in book stores.