Investors considering where to park their money have a choice: turn to a traditional financial advisor or trust an algorithm.
Promoted by online brokers as well as established financial institutions, robo-advisors are platforms that automatically invest users’ money, usually in exchange-traded funds.
Old-school advisors at banks and boutique firms can offer a more personalized approach based on in-person chats, but at a higher price.
Here are the pros and cons of both:
Robo-advisors
Algorithm-driven portfolios require lower fees and account minimums than their human counterparts and produce results that generally rise and fall with the stock market. These factors make them especially attractive to younger Canadians with smaller savings and a long investment timeline.
Typically, users complete a questionnaire that assesses their financial goals, risk tolerance, income needs, and expected retirement date. Then the provider (Wealthsimple and Questrade are two of more than a dozen major services in Canada) matches them with a pre-designed portfolio based on your comfort level.
“A young client, let’s say, coming to the market for the first time, is an option to consider if you’re basically starting out and just want to get everything up and running,” said David Boyd, a senior investment expert. BMO advisor Nesbitt Burns.
Fees are usually calculated as a proportion of assets under management – the amount of money in the portfolio. They typically range between 0.3 percent and 0.5 percent, although Questrade drops as low as 0.2 percent for assets over $100,000, while some can go as high as 0.8 percent. .
Most online brokerages that have emerged since the late 1990s do not require a minimum amount to open an account. Some automated platforms associated with banks, such as BMO Smartfolio, have a base value of $1,000.
“Robo-advisors provide what they need at a discount, which is one of the most obvious benefits of robos over traditional banking investment, along with ease, time savings and convenience,” said Christine Socasau, who runs InvestEase, RBC’s robo-advisor.
But those who appreciate more guidance or have complex financial needs may want to go the traditional route, he added.
“You will never sit down for coffee with your robo-advisor on the other side of the table.”
Some platforms offer telephone service for investment questions, but it is less personalized than a one-on-one relationship.
Despite the lure of low fees, the robo-advisor market represents a slice of the Canadian market with $26.4 billion in investments in September, according to Toronto-based ISS Market Intelligence research firm Investor Economics. That compares to billions of capital invested across the entire Canadian market.
To make sure their digital wealth manager is performing up to par, investors can compare their returns to major stock indexes over one to three years, such as the S&P 500 or S&P/TSX 60, said financial expert Tim Cestnick. personal and executive director of Nuestro Family Office Inc.
“We should be performing practically on par with those (indices),” he said.
Traditional advisors, that is, humans
Non-digital advisors can provide advice on demand, serving as a voice of experience and sounding board to discuss financial priorities or dilemmas.
“You’ve got a good financial quarterback, a live financial quarterback, on your side,” Boyd said.
“In a world where markets move quickly in both directions, you have a checkpoint where you can talk to someone about allocation…about making regular contributions, RRSP versus (Tax-Free Savings Accounts).”
In-person wealth managers can be especially helpful to those with a variety of financial considerations.
“I have clients who lived in Quebec and moved to Ontario, but they still have assets in Quebec, so it can be really complicated. And then if you’re a business owner, that’s even more complicated,” said Simon Préfontaine, financial planner at Lafond & Associés.
For clients over 20 or 30, the “holistic” approach offered by advisors who also function as financial planners can be especially helpful, Cestnick said.
“Financial planning advice should be integrated, meaning your retirement planning links to your investment portfolio, which in turn links to your tax plan, and in turn, your estate planning,” he said.
“If you’re looking for a broader plan, a robo-advisor is not the place to get it.”
The price of that broader, warmer, tailored approach is higher costs. Rates typically range between 1.5 and 2.7 percent, according to Préfontaine.
The minimum balance is also usually much higher. Furthermore, the stewards of that money are subject to all-too-human flaws, such as bias.
“But the most common problem we find with advisors is simply poor performance,” Cestnick said, emphasizing that investors should check the credentials, fees, references and performance history of their potential advisors.
“It is more common than uncommon. And that’s partly because the fees on the investment products themselves can be expensive.”
A mutual fund with a 1.5 percent fee combined with a separate adviser charge can add up to 2.5 percent in total fees, he said. “That’s a big number.”
Big bank or small boutique?
For those who see humans as the most sensible option, the question remains where to look for them.
Large banks offer countless advisory divisions that vary depending on the size and type of investment. Smaller assets can mean less access to a wealth manager, as well as a narrower range of investment products.
For example, CIBC Wood Gundy requires a minimum balance of $100,000. “If you only have less than $100,000, then you have to go to the CIBC branch. And at the CIBC branch they will only distribute CIBC products,” said Préfontaine.
Before deciding on a smaller firm, investors should make sure to use a third-party “custodian” for their clients’ assets, Cestnick said.
While Cestnick’s firm, which uses two custodians associated with National Bank and Fidelity Canada, can move money within a client’s investment account, only the client themselves can deposit or withdraw it.
“You don’t want a situation with Bernie Madoff. “He ‘guarded’ the assets of his own clients.”
This report by The Canadian Press was first published May 2, 2024.