What's up with these Robo-advisors?
26 July 2020 0
26 July 2020 0

Alanna Abramsky
(Enriched Academy Financial Coach / AFCC)

It’s been a few years now since the term robo-advisor has surfaced, and we get a lot of questions. So many in fact, we have an entire webinar dedicated to explaining what they are and how they work. No time for a webinar? No worries, we have answered most of the common questions below.

What is a robo-advisor?

A robo-advisor is an automated, online financial advisor. It combines a questionnaire or text chat regarding your investing preferences with a lot of high-tech software and algorithms to figure out an ideal asset allocation. It then builds a portfolio of exchange-traded funds (ETFs) for you and continuously manages this portfolio as necessary based on your investor profile — buying, selling, and re-investing dividends. If you don’t want to do DIY investing but still want the simplicity and convenience of investing in ETFs, a robo-advisor may be perfect for you.

What are the fees?

Robo-advisors don't use a lot of human management and have relatively low fees. They charge an MER fee (management expense ratio) on assets under management of anywhere from 0.30% to 0.60% for their services, and then you have to add on the ETF fees of around 0.10% to 0.30%. At the end of the day, you may be paying around 0.7%. This is probably going to save you a bundle compared to the other options.

Let’s break down how robo-advisors compare to actively managed funds (mutual funds) from the big banks. Canada has some of the highest mutual fund fees in the world and the MER fee can be as high as 2.3%. If you have a portfolio of $100,000 with a financial advisor, you could be paying more than $2000 in MER fees regardless of how your fund performs. But if you're using a Robo-advisor, you're only paying around 0.7%, or approximately $700. That extra $1300+ you're not paying in fees every year will really add up as your investment returns compound.

Which robo-advisor is best for me?

Good question! This depends on your preferences, goals, and the portfolios the robo-advisors use. Each robo-advisor offers something different, so it’s important to take a look at which one works best for you. Here are some of the different things to look into:

  • Fees (although this isn’t the only factor!)
  • ETFs that make up the portfolio.
  • The dashboard.
  • Other benefits. Some robo-advisors provide you with a dedicated financial advisor, estate planning, insurance needs, tax-loss harvesting, etc. This may be something that you require, so it’s good to look into your own personal needs.

What next?

There is no better time than the present! If your returns have been less than stellar over the last few years, it may be time to rethink your current investment strategy and take a hard look at why you are paying the fees you do. Or maybe you’re ready to grab the bull by the horns yourself and start to

secure your financial future, especially if you don’t have any high-interest debts that should be taken care of first! If you feel like you’re still lost, and need some guidance, you can always check out one of our upcoming livestreams or sign up for one of our free financial assessment calls.

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