FRANK GUNN/The Canadian Press
The robo-advice concept has been validated by one of the savviest players in Canada's financial services industry.
Power Financial Corp. is a, well, power in traditional financial advice through its stake in IGM Financial and Great-West Lifeco. Recently, it announced it would invest $10-million in WealthSimple Financial Inc., which provides low-cost online portfolio management using exchange-traded funds. If you've been wondering about whether robo-advisers are legit and effective, you can stop now. Power Financial says they are.
Still, robo-advisers are a business, and that means investors have to understand how they make their money in serving clients. To that end, here are three questions to ask before signing up with any robo-adviser:
1.) What are your fees? You're looking for a two-part answer. One part is the cost of the company's services in assessing your needs, building a portfolio and providing ongoing monitoring and rebalancing. The other part is the cost of owning the ETFs in your portfolio. Robo-advisers will ideally add the cost of advice – it's set as a percentage of client account assets – to the weighted average management expense ratio for its portfolios. That's the true ongoing cost of robo-advice.
2.) Who pays for trades? The kind of ETFs robo-advisers should be using are low-cost index-tracking funds that trade like a stock. Commissions to trade ETFs range from as little as zero at some online brokerage firms to $10 for the most part. Ask a robo-adviser whether these commissions are part of the fees you'll pay the firm, or an extra cost. These commissions can add up. Setting up and rebalancing a six-ETF portfolio could easily run you $60, with rebalancing adding another $60 or more in a year.|
3.) Which ETFs are used? ETFs tracking core indexes like the S&P/TSX composite and the S&P 500 have the lowest fees, so they're the ones that should be used in your portfolio. MERs for these ETFs should be in the range of 0.15 or less. Maybe a bit more for international exposure. If you see ETFs that don't meet these standards in a robo-adviser's portfolio, ask why they're there and if you can have cheaper ones used instead.
Rob Carrick