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Illustration by Melanie Lambrick

You might have heard about robo-advisers, the automated digital tools that help you manage your investments without actually managing them, and at a low cost. But what are robo-advisers really, how do they work and how do you know whether they’re the right choice for your finances? Here, we answer some common questions.

What is a robo-adviser? How do they work?

A robo-adviser is basically a software program that will automatically invest your money and balance your portfolio based on your investment profile.

Here’s how it typically works. You go online, sign up for an account with the robo-adviser of your choice, and answer a series of questions about yourself and what you’re looking for: things like your age, your risk tolerance, how long it will be until you need the money again, and whether you’re looking for additional factors such as socially responsible or halal investing. The robot (it’s not really a robot) will recommend a portfolio to you. Then you add money to your account, either in a lump sum or by setting up automatic withdrawals from your bank account.

After that, the software creates a portfolio of investments based on your profile and buys them with your initial funds. As time goes on, it will keep putting your cash in investments, and balancing your portfolio so it continues to match your profile.

The way this actually plays out depends on the robo-adviser. The steps might be slightly different, and each will work with a different set of investments. But the key points to remember are that the system is designed to be simple, so that you don’t have to worry about managing your investments, and automated, so a human doesn’t have to get actively involved.

What do robo-advisers invest in?

Robo-advisers generally invest in low-fee index-tracking exchange-traded funds, or ETFs. They’ll pick a selection of these ETFs for your portfolio based on your personal investment profile, and keep balancing the portfolio as you make deposits and the investments shift in value.

Which specific ETFs they buy depends on the robo-adviser, as does whether they include non-ETF investments. BMO SmartFolio, for instance, offers five different portfolio options, all of which include a mix of equity and fixed-income ETFs. CI Direct Investing’s range of portfolios runs the gamut from conservative to aggressive; in addition to stock and bond ETFs, CI Direct also offers real estate, private mortgages or other assets via private pooled funds.

Can you manage an ETF with a robo-adviser?

Robo-advisers buy ETFs on your behalf and manage your portfolio. But they will buy from their own selection of ETF options – you can’t pick and choose specific ETFs within your account.

If there’s a specific ETF you want to buy, you can look for a robo-adviser that includes it in their offerings. Alternatively, you can skip the robo-advisers and choose a self-directed investing strategy instead.

What are the pros of using a robo-adviser?

“Robo-advisers are an ideal investment solution for people willing to pay a modest fee to have a portfolio of low-cost exchange-traded funds built to their requirements and then managed on a continuing basis,” says Rob Carrick, The Globe and Mail’s personal finance columnist.

The benefits come down to two main things: convenience and cost-effectiveness.

The convenience comes from the fact that a robo-adviser is a set-it-and-forget-it system. Put a little bit of effort into creating your profile, organize a regular auto-debit from your bank account, and you don’t have to think about your investments at all. There’s also no need to set up an appointment or meet with anyone to get things started. Registration happens electronically, no paper required. Plus, you needn’t have a lot of money to start an account. Some robo-advisers have no minimum account value at all, though they might not actually invest the money until it hits a certain threshold, like $1,000.

The other main benefit is that robo-advisers tend to be low-cost – which makes sense, since you’re working with software, not a person with a salary.

How much does a robo-adviser cost?

You usually pay twice with a robo-adviser. One fee – a portfolio management fee – goes directly to them. It’s charged as a percentage of your account holdings. As with any ETF investor, you’ll also pay fees associated with those funds, which are deducted off the top of returns by ETF companies (net returns are reported to investors). While fees for buying and selling are generally included in the portfolio management fee, that’s not always the case, so check that when you’re comparing options.

How much does all of this add up to? It depends on who you’re buying from. In November 2021, Mr. Carrick reviewed different robo-advisers on a selection of factors, including costs. He found that all-in fees for most options ranged between 0.33 per cent and 1.05 per cent.

Can a robo-adviser give personal financial advice?

It depends on what you mean by personal. Robo-advisers don’t buy the same set of investments for everyone – they match each investment profile to one of their existing portfolios. But an investment profile is just that – a profile. It’s not going to be tailored to your specific individual situation.

If you want personal advice or simply to talk to a human, most robo-advisers have a support system you can tap into. But if your personal financial situation is complicated, they may not be equipped to offer advice. In that case, it might be a good idea to hire a financial planner.

Robo-adviser vs. a financial planner: What is better?

Neither is better necessarily – it’s just a question of which is better for you, right now.

The benefit of paying less in fees can be huge. Lower fees mean more money in your portfolio, and the difference can really add up over time.

But that doesn’t mean fees are inherently a bad thing. It’s a question of whether you’re getting value out of them.

“Our clients rely on us for so many things – not just the investment piece – that I can’t imagine a robo-advisor giving them what they need,” says Mary Ellen Byrne, vice-president, portfolio manager and investment adviser at TD Wealth Private Investment Advice in Halifax. “Everything is interconnected. They want to know about when to take CPP and OAS, and if it’s going to get clawed back. It’s not just stock picking.”

Most robos build cookie-cutter portfolios from a selection of exchange-traded funds designed to provide broad exposure to stock and bond markets, writes Tamar Satov in Report on Business Magazine. Wealth advisers, on the other hand, can choose from an open array of investment products on their clients’ behalf, which may provide better diversification.

Robo-advisers vs. self-directed investing: Which is better?

The difference here is in both convenience and confidence. Using a robo-adviser means you don’t have to get involved in the nitty-gritty of buying and selling funds, which is a time-saver. It also makes the buying decisions for you, which is a good choice if you’re not confident that you have the knowledge to make such choices, and aren’t interested in learning.

Essentially, you pay fees to a robo-adviser for a set of services: Setting up a portfolio to match your needs, investing money proportionately in all your funds when you make contributions to your account, reinvesting dividends, and periodic rebalancing – buying and selling ETFs to bring you back to your target mix of investments. You can also talk to people at robo firms to discuss your portfolio.

If you’re happy doing all of those things on your own, then self-directed investing might be a good choice for you.

Which are the best robo-advisers in Canada?

There are many options for Canadians looking to put their money in a robo-adviser, whether you prefer to work with a traditional financial institution or invest with an online brokerage or investment management service.

As for which to choose, the best robo-adviser in Canada is the best one for your needs. So how do you pick? Past performance might be a factor, but Mr. Carrick says it’s only one thing to look at. “Never choose a robo based on past returns alone,” he recommends. “Focus as well on fees and portfolio-building style.”

Another thing to look at is account size. While some robo-advisers don’t have an account size minimum (though, as noted above, they might not actually invest your money until it hits a certain point), others require an investment of at least $1,000. Keep in mind that fees vary based on account size, too – make sure to keep that in mind when assessing how much a robo will cost you.

Rob Carrick’s Robo-Adviser Guide

Ready to dig into the differences? Mr. Carrick’s review of 10 different robo-advisers in Canada compares them based on performance, fees, holdings, provinces served and more. Use the

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