Kyle Prevost Outlines The Advantages Of Using A Robo-Advisor
Finance Tips Kyle Prevost from youngandthrifty.com breaks down robo-advisers and how they manage your investments.
Mediaplanet: Is there a difference between robo-advice and online investment platforms?
Kyle Prevost: Online investment platforms (commonly referred to as discount brokerages) are the ultimate option if you want to cut costs and embrace DIY investing. After opening an account you can buy and sell stocks, exchange-traded funds (ETFs), mutual funds, and bonds. While many discount brokerages include some type of educational element, such as advice articles, various types of filters, or charts, they do not feature any direct advice. Discount brokerages also do not offer the type of easy and automated indexed diversification/rebalancing that robo-advisors were created specifically to provide.
MP: Is there anything specific that robo-advisors invest in?
KP: All of Canada’s robo-advisors offer slightly different takes on the same core philosophy of index investing. For those who aren’t familiar, index investing is essentially the idea of trying to capture the average return of a specific group of securities while keeping fees as low as possible. For example, if you wanted to invest a certain amount of your overall portfolio in Canadian stocks, you might choose an index fund or ETF that tracks the TSX60 index. This means that you will get the weighted average of the 60 largest companies in Canada. There are indexes for bonds, international stocks, real estate, and much more. The key takeaway when it comes to index investing is that you are basically buying into the mathematically proven idea that human beings are really bad stock pickers, and that you’re better off just spreading your money across a wide variety of asset classes and geographical locations in as cheap a way as possible.
MP: Are robo-advisors real financial advisors, or is there an algorithm that decides where or what you will invest in?
KP: Robo-advisors have the misfortune of having one of the most inaccurate names in the financial world. When you invest money with a robo-advisor, you can have a conversation with a real human before any money gets invested. This person will be a trained professional and will be able to answer any general question you throw at them. In my personal opinion, the vast majority of advisors will be able to answer 99 percent of your questions. If you have already accumulated a substantial number of assets and are looking for advice on estate planning, your will, setting up an income trust or a similarly niche topic, then it’s possible they will not be able to answer that question directly, and you will have to find a professional to help with that specific area of concern.
During the initial conversation you have with these advisors, you will determine together the right asset mix for you. For example, if someone was far away from needing to take out their retirement investments and they have a high appetite for risk, their investing portfolio would likely tilt heavily to riskier assets that have high long-term returns, such as stocks. If someone was looking to retire in the next few years, they would likely be much more averse to risk and consequently have a much higher proportion of their portfolio in safe assets, such as government bonds.
Once you and your advisor have determined the right mix for your situation, every time you send money from your paycheque or savings account to the robo-advisor, it will automatically split it up into the pre-agreed upon baskets you have created. Obviously, if you have questions or want to change the weighting of your basket, an advisor is always there to listen and give feedback.
In Canada anyone can call themselves a financial advisor, so that isn’t really a good measuring stick. The bottom line is that Canada’s robo-advisors are usually registered as portfolio managers, which means they have a fiduciary standard of responsibility. Legally, they are held to tougher rules than someone simply using the term financial advisor.
MP: Why have ETFs become so popular?
KP: ETFs have become popular because they allow you to keep more of your hard-earned investment dollars working for you, instead of paying for the third yacht of some Bay Street big wig. ETFs aren’t magic however. The original intent of basic index ETFs was to get investors the average returns of a given market while slicing fees to an absolute minimum. This is extremely important when it comes to your long-term investment growth, especially when compared to Canada’s mutual fund fees which are the highest in the world. Of course, now that the products have become popular the financial world has seen fit to confuse people by calling all kinds of exotic investment instruments ETFs. The key is just to keep it simple and look for the tried-and-true vanilla ETFs that have extremely low MER fees and track a basic index if you are intent on going the DIY route.
MP: Are ETFs good investments for beginner investors or only for more advanced investors?
KP: Because the financial industry has crowded into the ETF space with all kinds of weird and wacky products it’s not really accurate to say “all ETFs are good for this specific group”. What I’ll say instead is that index investing is the best fit for beginner investors… as well as moderately experienced investors, old investors, young investors, smart investors – you might notice a pattern here? The bottom line is that index investing is mathematically proven to be the best investment strategy for all but the most elite investors. People like Warren Buffett or massive pension fund managers that have access to all kinds of premium assets, information, and tools can do very well picking winners that beat the overall averages, but everyone els is much better off embracing index investing.
Of you stick to the basic index ETFs and discount brokerages you will not find a solution that keeps more of your investment dollars in your pocket and allows you access to diversified markets in a very accessible way. If the whole idea of learning how to use discount brokerages and purchasing ETFs in order to rebalance your portfolio a few times every year sounds intimidating to you, (as it does for a lot of Canadians) then I think robo advisors are a great value, and offer the easiest way to get money from your paycheque to a nest egg that is growing through index investing strategies.