How to Choose A Robo-Advisor in Canada

If you want to invest in the markets, and you prefer a less involved approach, then a robo-advisor could be a good option for you. With them, you'll have access to a range of investment portfolios you can choose from, depending on your goals, needs, and requirements. As a bonus, they're also far cheaper than investing in mutual funds or through a financial advisor. Recently, a very competitive landscape has emerged in Canada, with competition among robo-advisors, like Wealthsimple vs Questrade, and Betterment vs Vanguard.

The problem is, however, that it's often difficult to know which one to choose. Fortunately, we're here to help and with this post, we'll show you some of the things you should look at when choosing a robo-advisor.

What Is a Robo-Advisor?

Robo-advisors are digital platforms that provide you with automated financial planning and investments. A robo-advisor collects information about you, your financial situation, and your financial goals. By using algorithms, it then offers advice and automatically invests your capital.

How to Choose a Robo-Advisor 

When you've chosen to invest your money through a robo-advisor, or you're considering one, your first step will be to decide on the best one for your needs and requirements.

What Fees Do Robo-Advisers Charge?

The first thing that sets robo-advisors apart from mutual funds, and what you should consider, is fees. Here, mutual funds typically charge 2% to 3% of your investment portfolio in management fees every year. In contrast, with a robo-advisor, this fee will generally be less than 1%.

To see the difference, let's look at an example. Let's say that you have $10,000 to invest. If you invest in a mutual fund with a 3% fee, you'll pay $300 a year as a management fee. When you, however, invest the same amount through a robo-advisor with a fee of 0.5%, you'll only end up paying $50 in fees.

Average MER 

Besides management fees, you'll also have to pay a management expense ratio (MER). The ETF you invest in through the robo-advisor charges this fee. As such, they're not paid to the robo-advisor, but the fund or portfolio managers. Also, these fees are deducted directly from the ETF.

MERs are typically between 0.2% and 0.35% of your invested assets but can be higher in some circumstances.

To see how this works, let's look at an example. Let’s again use the example above where you invest $10,000. If the average MER for your portfolio is 0.2%, you'll have to pay $20 in fees. So, taking into account the 0.5% management fee we mentioned above, you'll end up paying about 0.7%, or $70 in fees.

Although this is still cheaper than investing through a financial advisor, it's more expensive than if you invested in an ETF yourself.

Investment Options

The next thing you should consider when deciding on the right robo-advisor are its investment options. Here, it comes down to two things, the accounts the robo-advisor offers and its choice of investments.

In respect of accounts, you'll have to consider your financial goals. So, for example, if you want to save for retirement, you may opt for a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). Likewise, if you're saving for education, you may opt for a Registered Education Savings Plan (RESP). 

When it comes to the choice of investments you have, Canadian robo-advisors typically invest your assets into low-cost ETFs. The benefit with these is their lower fees compared to mutual funds. Another benefit is that they offer you diversification in your investment portfolio. This ultimately reduces your risk.

So, with your financial goals in mind, you'll have to look at whether the robo-advisor offers the accounts and the choice of investments you need.

User Friendly

You should also consider whether the robo-advisor platform is user-friendly. Remember, the idea of investing with a robo-advisor is to make investing simpler. It should thus have an intuitive user interface. It should also be easy for you to track how your investments are performing. Also, you need to consider whether they have customer service available if you have any questions.

Fortunately, most robo-advisors available in Canada are now moving to a hybrid approach. This means, although you invest through an automated system, you'll still have the ability to speak to actual financial advisors or customer service agents.

Keep in mind, though, that these financial advisors or agents generally cannot make investments for you. They're only there to answer your questions.

Are Robo-advisors Safe?

Your money will generally be safe when you invest with a robo-advisor. You need to remember, though, that, as with any other investment, there are risks. 

Because robo-advisors invest in ETFs that track the market, they won't underperform the market, but they likely won't outperform it either. In simple terms, if the market's going down, so will your investment. 

Boris Dzhingarov graduated UNWE with major Marketing. He is the founder of Cryptoext.com