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Robo-advisers thrive, but when do you need a human?

Robo-advisers build portfolios that are attuned to the client’s risk tolerance, goals and personal profile.


As an investor who already builds his portfolio online, John Oldman wonders: Is it worth trying an investment robo-adviser?

"It sounds great, and I'm interested, because I think it can take the emotion, the bias and gut feeling out of investment decisions," says Mr. Oldman, 35, who owns and manages residential properties. "But in my mind it's only going to be as good as the algorithm that's being used."

Since he was in his 20s, Mr. Oldman has been buying and selling online. His brokerage account with one of Canada's big banks offers him sophisticated research tools and lets him make more complicated orders such as stop-losses and setting target prices for taking profit.

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Still, the advent and growing popularity of robo-advisers in Canada raises the question: When is it better to go with the streamlined, easy approach that robo-advice offers and when is it better to seek other options, including a human financial adviser?

Robo-advisers streamline investing by managing portfolios automatically. Investors answer questions about their finances and goals and then the robo-advisers' algorithms provide advice and make decisions.

More than 10 robo-advisers operate in Canada; they're characterized by low fees and low minimum account requirements, making them attractive to younger and new investors.

"Robo-advisers do several things very well, including choosing an asset allocation, building a diversified and low-cost portfolio, and rebalancing that portfolio with discipline. That's all many people need," says Dan Bortolotti, associate portfolio manager at PWL Capital Inc. in Toronto.

If you are a long way from retirement and you're socking away a few hundred dollars a month in your tax-free savings account or your registered retirement savings plan, you may not need anything else, Mr. Bortolotti says.

Investors have misconceptions about what robo-advisories offer, says Chris Nicola, co-founder and chief technology officer of WealthBar, based in Vancouver. In addition to robo-investing, his company offers a dedicated financial adviser to help investors plan and make decisions.

He notes that his company may be an exception in Canada, as other robos don't necessarily offer a human adviser. Even so, as Mr. Oldman notes, robo-advisers are attractive to millennial investors because they offer low fees (at WealthBar, from zero to 0.6 per cent, depending on the account) as well as low minimum investing requirements.

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"That would be attractive to many people," Mr. Oldman says. But would they stick with robo-advisers or move on some day to direct investing or full service? "Only time will tell," Mr. Nicola says.

The hybrid idea of robo-service, with human help available, seems to be an attractive model for companies across the financial services sector, even beyond investing.

"After all, 52 per cent of our customers engage with us through mobile devices," says Anthony Lipschitz, chief strategy officer at Thinking Capital, a 10-year-old firm that has provided more than 10,000 small and medium business loans to Canadian companies.

Mr. Lipschitz's firm has just developed an intuitive robotic loan adviser, called Lucy, that deploys artificial intelligence to take mobile users through a series of questions to see whether they qualify for a business loan. If Lucy isn't able to help a customer, the caller is shifted to a chat line with a real person.

Mr. Nicola says he doesn't see any trend so far of robo-adviser users moving away to more hands-on, do-it-yourself services like the one Mr. Oldman deploys.

"I would think the trend would be in the other direction," Mr. Nicola says. "People may try DIY first, but if it becomes too cumbersome or they get poor results they will seek help."

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But there are times when investors may need additional services that robo-advisers cannot provide, Mr. Bortolotti says.

"If you're approaching retirement, you should probably work with a financial planner to make sure you're on track to reach your goals. Of course, you could use a fee-only planner and still have a robo-adviser continue to hold the investments. I think these can be complementary services," he explains.

Another situation where you might need more than a robot to lean on is if you are already retired and drawing down your portfolio.

"You may need advice on how to do that in the most tax-efficient way. Which account do you draw from first, for example? You may also need to set up the portfolio in ways that robo-advisers can't do, such as using GICs and savings accounts to manage cash flow," Mr. Bortolotti says.

"If a significant portion of your portfolio is in taxable accounts, you probably need more individualized service," Mr. Bortlotti adds.

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