It should be comforting to anyone who cares about the investing success of the nation that robo-advisers have been scooping up new clients since stocks went ballistic last spring.
Everything about investing has been extreme over the past 12 months – the profits booked by even rookie investors, the volume of trading, the number of people signing up for investment accounts. Robo-advisers don’t do drama. They simply build diversified portfolios of exchange-traded funds for clients and then manage them for a low fee.
Robos are a smart choice for investors seeking a middle ground between doing it yourself with an online broker or trading app and having a human adviser. But there are some nuances to choosing and using a robo that can help investors have the best possible experience. Here are four things to keep in mind:
Robo-advisers are catching on with investors
Something about robo-advisers gets right up in the grill of traditional advisers, most of whom would never consider working with the kind of small- to medium-size accounts that are foundational clients for robos. As a result, you may have heard robos dismissed as gimmicky, ineffectual or ill-suited for bear markets.
But robos increased their assets at a very respectable year-over-year rate of about 55 per cent in each of the past two years, according to the data analysts at Investor Economics. Assets are estimated to have topped $10-billion earlier in the year.
Online brokers drew a lot of business last year as well, but generated less than half the asset growth of robo-advisers. True, online brokers have more than 60 times the assets of robo-advisers. But there was a speculative tilt to investing in 2020 that favoured the kind of stock trading that online brokers specialize in offering.
Keep an eye on fees
The exchange-traded funds that robos use to build portfolios compete vigorously on fees. But, with a small number of exceptions, robos themselves have shown little willingness to change the fees they charge clients to build and manage portfolios.
The latest of these exceptions comes from Nest Wealth, a robo that is unique in using flat fees for various asset levels and not charging a percentage of client assets. As of July 1, Nest will move from three fee tiers to four. Where clients with accounts of $150,000 and up now pay a flat $80 a month, they will soon pay $100 monthly for amounts between $150,000 and just below $325,000 and $150 a month for $325,000 and more.
Nest says that 80 per cent of its clients will pay the same or less under the new fee structure because it will now include both the cost of ETF trades and account administration fees. Previously, clients paid separately for these expenses to varying extents. A couple of Nest clients have contacted this column lately to complain that they will pay more under the new pricing.
The other price move of note came a couple of years back, when QuestWealth Portfolios set its portfolio management fee at 0.25 per cent for balances of $1,000 to $99,999 and 0.2 per cent for balances of $100,000 and up. Most firms charge 0.5 per cent for smaller accounts and 0.4 for larger ones.
There are too many robo firms
The Globe and Mail Robo-Adviser Guide published last fall included 11 players, but we’re now down by one. Invisor has been folded into iA WealthAssist, a digital investing platform that exists within the advisory universe and is not offered directly to investors. This follows the purchase of Invisor in 2018 by Industrial Alliance Insurance and Financial Services Inc.
Expect more consolidation to come. We have 10 robos and an estimated $10-billion in assets, much of which sits with industry leader Wealthsimple. What’s left over would seem insufficient to sustain everyone in the long term.
Consider the long-term prospects of a robo adviser when choosing one. Should your firm fold into another, be on the lookout for any changes made to your fees or asset mix. A small robo isn’t going to tell you it’s looking for a buyer, but you can at least poke around its website to ensure it’s well tended and up to date.
Be realistic about returns
Robos build diversified portfolios designed to carry you through decades of investing. Unless you pick a mega-aggressive portfolio, you will not match the returns of stock indexes like the S&P/TSX Composite, S&P 500 or Nasdaq 100. Nor should you. If your portfolio excels in a strong market, you’re vulnerable to being slaughtered in the next bear market.
Please do not draw sweeping conclusions about returns from your robo-adviser, or any other investment, over periods of one year and less. Three- and five-year periods are more instructive. And, ensure you make relevant comparisons when assessing returns. Suggestion: Check out returns for balanced ETFs that have similar asset mixes to your robo account.
Your robo portfolio will ideally be very close to or better than a comparable balanced ETF, with allowances made for the fact that your robo charges more in fees for portfolio management.
Balanced ETFs are a complete portfolio in a single fund. You have to buy and sell them yourself using an online brokerage, which may or may not offer levels of performance reporting and fee disclosure comparable with a robo-adviser.
A serious robo will publish returns on its public website for at least some of its preset portfolios, typically conservative, balanced and growth. Look for calendar-year returns, plus annualized and cumulative returns over both short and long periods of time. You can’t take a robo seriously if it’s not publishing this information. Top marks to firms that tell you whether returns are before or after fees and compare their portfolios to a blend of benchmark stock and bond indexes.
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