The world of automation and machine learning is increasing at a rapid pace than ever before. Convenience being at the forefront of many corporate mandates is fueling a world where artificial intelligence tells us how long it will take to get to work, what outfits are trending right now, and where to grab a cheap bite to eat nearby. It didn’t take long for this mandate to work its way into the finance world and change the way personal investing and advisory services are done today.
I’m specifically referring to the increasingly popular use of “Robo Advisors” by retail investors, and individual investors like you and me. To explain in a nut shell, a Robo Advisor is essentially an algorithm that’s been programmed to offer you investment products that best suit your needs and criteria, without the human interface experience. Instead of a financial advisor at your retail wealth management office telling you where your money should best reside given your retirement goals and current age and income, a computer program will offer the same services to advise clients and construct portfolios based on, well, retirement goals, current age, and income. Robo advisory services will typically self manage your portfolio once constructed, and auto rebalance positions in the portfolio over time, as well as buy new positions and sell old positions over time, depending on the investing strategy set by the investor.
The main difference between robo advisors and human financial advisors is obviously the use of automation and AI to do the same job that a human would do. Not only are robo advisors much more efficient than a human advisor in terms of rebalancing holdings, but the automated service is so quick and cheap because of the lack of human involvement. Some robotic advisory services do still offer support from human financial advisors for clients, but the cost savings of replacing a large team of human financial advisors and back end support through automation grossly outweigh the involvement of a few retained human advisor personnel. Most robo advisors are also registered as certified portfolio managers, meaning the fiduciary responsibility of the clients are held in check, just like it would be through any financial advisory or wealth management service. Robo advisory services are also typically part of IIROC and CIPF, meaning they are again obliged to keep the fiduciary responsibility of their clients at the forefront of any decision, as well as disclose any investment risk associated with the client’s portfolio, and offer protection of up to $1M dollars of the client’s portfolio assets in the event of insolvency. Again, a lot of this is similar to how human financial advisory and wealth management services operate and are governed to protect their client’s investments and well being.
The obvious pros of robo advisors are low cost and efficient portfolio rebalancing and management. Because of low costs, robo advisors typically do not require a minimum investment account balance, and individuals can start investing with these services with as a low as $1. Setting up accounts and choosing investment strategies through a robo advisor are also typically very simple and intuitive to use, especially for RRSP and TFSA accounts. Robo advisors will have access to a wide range of ETFs to purchase at low costs compared to actively managed mutual funds. Some lesser known advantages of having a robo advisor come in the form of perks such as discounted professional memberships, access to airport lounges, and other deals and offers on restaurants and home office products, to name a few.
Maybe it’s because I’m of the millennial generation who are at the forefront of developing and implementing automation in day to day life for added convenience, but I struggle to come up with major cons for robo advisors. Perhaps transparency into how your portfolio is being managed could be viewed as a disadvantage for some. Others might see the lack of human one on one engagement with a financial advisory as being an “untrustworthy” service. I suppose it’s like trying to have an effective meeting at work when all your meeting attendees are Skyping in remotely, and the line remains silent after every time you ask a question. Maybe this only happens when I run meetings.
The motivation for bringing up this topic is because I think personal investing is moving more and more to self managed portfolios with the assistance of robo advisory services. WealthSimple is one of the biggest advisory services in Canada, and continues to grow. Why pay a 1% fee to a retail financial advisor when you can be paying less than 0.1% for a robo advisor to manage your portfolio with no minimum investment restriction? Robo advisory services are continuing to “eat the lunch” of retail financial advisory services, and I believe it will continue to do so as automation and AI matures and grounds its presence in the finance and money management world.
To conclude the article, here are a list some popular Canadian robo advisors:
Responsive (this is more for financial advisors)
Questweatlh Portfolios by Questrade
Even some large Canadian banks are starting to offer robo advisory-like services. Some of these include: