Science-fiction writers have long been predicting that robots will take over the world, and those predictions could soon come true in the lucrative investment advice market.
Recent years have seen the emergence of digital financial advisers — known as robo-advisors — which take advantage of modern technology to offer low-cost investment management services. In this guide we explain how robo-advisors work and how you can compare the services offered by different providers.
A robo-advisor uses complex algorithms and technology to perform many of the same services as a traditional financial adviser. These digital advisers can provide financial plans to consumers and automatically manage their investments.
Robo-advisors usually invest in Exchange-Traded Funds (ETFs), which are like mutual funds in that each fund holds a variety of securities spread across a range of businesses interests. However, ETFs trade like stocks on the stock market, rather than being bought and sold in pieces like shares of a mutual fund. Because ETFs exist in large variety and are often created by index-based formulas instead of by manual curation, they provide a relatively easy and inexpensive way to automate the investing process.
Digital advice services are based more on building and maintaining a portfolio than providing strategic advice, so there will still be a place for traditional financial advisers in the future – in fact, the advantages the technology presents could be very useful tools for financial advisers.
Unlike a traditional financial adviser, a robo-advisor isn’t influenced by emotion when making trades — it relies solely on algorithms and mathematical models to determine the right asset allocations for investors. They’re also much cheaper, with robo advice available for as little as 1/10 of the cost of receiving advice the old-fashioned way.
But how does the service match you up with a portfolio?
Details. Provide your investment goals, investment time frame and appetite for risk so it can assess which portfolio you’ll be most comfortable with.
Review. The robo-advisor generates a recommended investment portfolio, which is usually based on exchange traded funds (ETFs). Review the portfolio and its terms and conditions to ensure you fully understand the risks of investing.
Invest. Once you’ve invested, the robo-advisor manages your portfolio and rebalances it whenever necessary to ensure it remains in line with your risk tolerance levels.
The rise of robo advice
The robo advice revolution has its origins in the US financial crisis of 2008 when the first robo-advising company, Betterment, was launched. However, Betterment didn’t begin receiving money from investors until 2010.
The movement didn’t spread to Canada until 2014 when WealthBar launched as the first full-service robo-advisor in the country. Since then, companies like Wealthsimple, Nest Wealth and JustWealth have enjoyed enormous success.
Canada’s big banks have even started to get in on the action, with BMO launching Smartfolio, a hybrid investment service that makes use of automated processes supervised by professional human advisors. RBC has similarly launched InvestEase, which offers robo-advising services as well as support from accredited portfolio advisors.
Altogether, Canada’s robo-advisors manage around $5.5 billion USD in assets (over $7 billion CAD), and the number is expected to grow dramatically over the next decade. We’ve profiled and compared the established players below to help you find the best investment service for you.
As mentioned, big banks like BMO and RBC have also moved into the robo advice sector. To align with portfolios that best suit your needs, you’re typically screened with questions about your current financial situation and future goals before being provided with customized advice and assessment.
How do I sign up to a robo advice service?
The signup process differs between robo-advisors, but you’ll generally need to follow these steps:
Provide your name, contact details and proof of identity.
Complete a questionnaire regarding your investment time frame and your tolerance for withstanding market fluctuations.
The robo-advisor generates a recommended investment portfolio.
If you’re happy with the portfolio, you can proceed with the recommended strategy.
Provide your bank account details to fund the investment.
The robo-advisor invests your money in the chosen portfolio, monitors the account and then makes adjustments to satisfy your tolerance for risk.
Robo advice may change the face of wealth management around the world by offering a more affordable way for you to look after your investments. However, make sure you compare the benefits and features of the different robo-advisors before choosing the right service for you.
Shirley Liu is Finder's global program manager. She was previously the publisher for banking and investments and has also written comparisons for energy, money transfers, Uber Eats and many other topics. Shirley has a Master of Commerce and a Bachelor of Media, Journalism and Communications from the University of New South Wales. She is passionate about helping people find the best deal for their needs.
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