Can I trust a robot with my money?

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Can I trust a robot with my money?

I recently wrote an article exploring mutual fund fees in Canada, as compared to the rest of the world. There’s no denying that we have some work to do when it comes to the overall costs involved with mutual fund providers. I concluded that mutual funds, while expensive, do have merit for the right investor. However, for those with $25k or more, there are other options to consider.

I recently started thinking about the new robo-advisory trend. It seems to be all over my Facebook feed. Although the industry is still very much in its infancy in the U.S, and barely a toddler in Canada, it’s getting a good amount of attention – especially with the younger demographic.

It makes sense that the adopters of this trend are generally younger. Later generations are technologically savvy, typically have smaller investable assets, and are the ideal target market. With little-to-no service from banks, and high costs for investments, that generation definitely needs an affordable alternative. Still, I have to wonder: are robo-advisors the right solution? What are their other options?

The main selling feature is clear – lower cost!

Over the past few weeks, I researched a variety of Canadian robo-advisory firms. I’m interested in the full costs associated, service offerings, and historical performance. That last one – performance – was by far the hardest to find. If you’re curious, I posted the links to performance numbers in the reference section of this article.

First things first. When it comes to fees, Wealthbar offers five ETF portfolios for approximately 0.95%, and WealthSimple offers ten ETF portfolios for around 0.65-0.88% (depending on the level of risk).

For a fair comparison, I related that to a balanced portfolio, which would typically cost around 2%. For 1.0% - 1.50% in savings, what am I actually getting, and what am I giving up?

I created the following matrix and reviewed four different balanced portfolios. Below is a comprehensive comparison. I used a $100k portfolio and invested within four different options, all with a balanced/medium level of risk. The matrix goes beyond the question of cost to include the qualitative services involved with having an advisor.

The first is a separately managed account offered by Canaccord Genuity, the second is a managed Balanced ETF portfolio offered by BMO, and the third and fourth are balanced portfolios from WealthBar and WealthSimple. I’ve placed them from highest to lowest cost.

**WealthSimple YTD, 2015 and 1-year performance based on current holdings. Performance information not available on their website, or when asked.

While cost is important, it shouldn’t be the most important factor. If that were the case, the first line of the table above would be our only determinant. Let’s be honest; that just doesn’t make sense.

Here’s why. Investment is also about performance, access to consultants, financial and estate planning, and face-to-face interaction with advisors who focus specifically on your unique circumstances. Overall cost isn’t the bottom line.

Given the recent market volatility, more clients are demanding higher levels of service, and that’s expected! Investment advisors serve on the front lines of the financial retail business –  they’re there to assist in the good times and the volatile times. Knowing that someone is monitoring your retirement or investment funds brings a lot of peace of mind, and so is a huge benefit.

Let’s use a case study as an example. During a recent visit with one of our clients, we learned that his spouse was diagnosed with cancer. She was about to start chemotherapy at twenty-eight years old. This family tragedy had put a huge financial strain on an already difficult situation. Our client has since put his work on hold, and is looking at his TFSA as a potential source of income.

Needless to say, he was glad to have a team of advisors who care by his side. Those advisors can take action within his portfolios to mitigate risk and account for new life-changing events. Robo-advisors are simply not there yet – and they lack the empathy that comes with real interaction.

Lastly, when figuring out which investment is right for you, robo-advisors use a handful of questions to determine which category you fall into. I argue that this process isn’t accurate enough in two main ways.

First, your asset mix shouldn’t stay stagnant over time, but rather move based on time horizons and important life changes, which are not typically captured in these forms. Second, robo-advisors are trying to use a one-size-fits-all model. The investment world involves a lot of variables, which makes it really hard (or impossible) to find a blanket solution.

To sum it all up, expect to see banks and investment firms adding a digital service component to their offerings in the near future. It’s a cost efficient option aimed at smaller accounts, and it benefits the provider rather than the user. Robo-advisors save the time and money that firms spend serving smaller investors, whom account for a large portion of users and are costly to firms.

RBC, for example, recently announced the release of their version of a robo-advisory platform. In a recent article by Paul Lucas in Weath Professional, John Taft, the CEO of Royal Bank of Canada Wealth Management in the USA, did have an interesting note about the new service: he claimed it “’will never be a replacement’ for the service and personal relationships that financial advisors can provide.” 

Take the time to evaluate your options.

Consider robo-advisors and interview investment advisors. Just be sure to look beyond the costs, and consider track record, investment approach, and experience.

Also - don’t be shy to ask for referrals! My team and I get that question all the time, and are always happy to share. 

There’s no stopping this movement, and I wouldn’t have it any other way. I actually love the idea, especially as the big banks and investment firms start to push big dollars behind it. That being said, I share the sentiment of many: I don’t want to be the first guy on the road in a self-driving car with no steering wheel. There’s benefit in waiting until it’s fully tested and hacker-proof. After all, it’s your life – and your retirement portfolio – on the line.

As always, I look forward to your comments and can be reached directly by email: ludovic.siouffi@canaccord.com.

WealthSimple Rick Level 5 Portfolio Performance: http://help.wealthsimple.com/hc/en-us/articles/214880037-How-has-the-Risk-Level-5-portfolio-performed-

WealthBar Balanced Portfolio Performance: https://help.wealthbar.com/11892-performance/how-has-the-balanced-etf-portfolio-performed

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