When I first heard the term robo-advisor, I had so many questions.
How soon can I get a robot?
Will this robot do my laundry for me?
Can I call my robot Kevin?
I soon learned that my questions were a bit, how shall we say, misguided.
Fortunately, I work at a financial institution and knew where to turn for answers.
I recently sat down with Vancity director of Wealth Solutions Robert Deeg to learn more about robo-advisors.
What is a robo-advisor?
“A robo-advisor is an online, digital investment service that helps you invest towards a goal,” says Robert. “It uses highly-specialized software to provide automated, algorithm-driven investment advice.”
Robo-advisors invest primarily in exchange-traded funds, more commonly known as ETFs.
An ETF is an investment fund that trades on the stock exchange.
Like a mutual fund, it pools money from many investors into a big fund that gets invested in a mix of different assets (stocks, bonds, real estate, etc.). Unlike a mutual fund, it is traded on the stock exchange and usually tracks a specific index or market.
“In a nutshell, ETFs combine the diversification of a mutual fund with the flexibility of a stock, but with lower fees than mutual funds,” explains Robert.
How does a robo-advisor work?
When you sign up with a robo-advisor, you usually start by answering an online questionnaire. It usually covers things like your financial goal, the amount you’re investing and for how long, your level of investment knowledge and the type of investment scenarios you’re comfortable with (i.e., does a graph that goes up and down a lot make you super nervous?).
“Through a series of questions, a robo-advisor determines your risk profile,” explains Robert. “Based on your appetite for risk, its algorithm will determine what the best portfolio is for you.”
The robo-advisor continually monitors your investments according to the portfolio identified for you. If changes in the market shift your asset allocation, your portfolio is automatically rebalanced so it always stays aligned with your target mix.
You can think of a robo-advisor as an option that falls between the completely do-it-yourself model of an online brokerage and the full-service model of working with an investment professional.
|Type of investing
|Completely do-it-yourself: do your own research, make your own decisions, make your own investments.
|Self-managed, without having to research investments and monitor markets. Robo-advisor chooses portfolio based on your profile and automatically rebalances.
|Financial institutions, including credit unions like Vancity
|Full-service personal advice and support.
Who are robo-advisors best suited to?
Overall, robo-advisors are best suited to people who are comfortable in the digital world and are looking to make a long-term investment (at least five years is best).
Here are a few types of people that robo-advisors generally work well for:
1) The uber-busy
Robo-advisors tend to work well for people who lead busy lives and don’t have time to meet with an advisor. The online platform allows them to do their investing at any time of the day, plus they don’t have to spend a lot of time doing research and making decisions about their investments.
2) The cost-conscious
Robo-advisors typically cost less than a professional investment advisor, so they are well-suited to people looking to save money.
3) The newbie
A robo-advisor is a quick and easy way for a new investor to get started. It’s a less intimidating option for those who don’t feel quite ready to talk to an investment professional. Robo-advisors also generally have low minimums to get started and make it easy to set up automatic deposits to get you in the habit of investing regularly.
“We’re seeing more and more people looking for a hybrid solution that mixes full-service with self-service,” says Robert. “For example, some people manage one part of their portfolio, like their RESP or TFSA, through a robo-advisor, while working with an investment advisor to manage their other investments and overall financial plan.”
What about socially responsible investing?
Many of us want to invest according to our values and, fortunately, many robo-advisors offer some form of responsible investing portfolio. However, they are not all created equal.
Some questions to consider when reviewing responsible investing options:
- What does the portfolio invest in?
- How do they define what’s considered responsible? What are the criteria?
- What portion of the portfolio is invested in responsible initiatives/investments?
- Are they passively or actively-managed investments?
This last question about passive vs. active investments is important because of something called shareholder engagement.
“ETFs are usually passive investments, so there likely isn’t any engagement that those fund managers do with the industry,” says Robert. “With an actively-managed socially responsible fund, the fund managers will proactively engage with companies to improve their environmental, social and governance practices.”
Vancity has teamed up with VirtualWealth, which offers one of the few actively-managed, socially responsible mutual funds in a robo-advisor solution, VirtualWealth RI (Responsible Investing).
Sounds pretty good, but what’s the catch?
There’s no catch, but like anything in life there are pros and cons. While robo-advisors are convenient, lower cost and accessible 24/7, they can’t replace the personal, holistic financial planning advice of an investment professional.
“Robo-advisors don’t provide a full financial plan and also don’t understand your emotions – at least not yet,” says Robert, hinting at what artificial intelligence might be able achieve down the road. “But they are a great option for many people, especially those with busy lives who want to manage their investments online.”
We recommend that you talk to your financial institution or advisor to get more specific advice.
Curious if a robo-advisor is the right solution for you? Call 604-709-5955 to have a quick assessment with one of our advisors about whether a robo-advisor may be right for you (Monday to Friday 9 am to 6 pm and Saturday 9 am to 3 pm).
VirtualWealth is a trade name of Credential Qtrade Securities Inc. Online brokerage services are offered through Qtrade Investor, a division of Credential Qtrade Securities Inc.