What is a robo-advisor?



Robo-advisors are online investment advisors that offer a more modern investing experience to their clients. A robo-advisor uses technology to help its clients open their investment accounts online, check in on their investment on the go, or contact an advisor on their phone or computer. ModernAdvisor is a robo-advisor.

Some people find the term robo-advisor somewhat misleading because it may suggest a robotic approach to investing and servicing clients. In reality, a robo-advisor employs highly qualified financial and investment professionals to make decisions on investment portfolios and provide advice and support when clients need it. The term “robo” in robo-advisor really stems from the fact that a robo-advisor uses software to automate many of the tasks that were traditionally performed by high earning portfolio managers.

A robo-advisor also suggests a suitable investment portfolio to clients based on answers to an online questionnaire. These questionnaires help determine the client’s investment goal, timeframe, and their comfort level with taking investment risks. A robo-advisor uses software to continuously monitor every single client account, and rebalances that account to the desired target mix of assets automatically.

In short, a robo-advisor utilizes technology to make professional investment and financial advice available to more people. By automating mundane tasks and streamlining the entire investment process, a robo-advisor reduces costs. robo-advisors usually pass on these cost savings to their clients.


Robo-advisors are low cost, but what about investment returns?

Some people are conditioned to think that more expensive means better. While that may be the case when it comes to watches and purses, it just doesn’t hold true when it comes to investing. There is an overwhelming body of research that statistically proves low-cost investments perform better than higher cost alternatives in the long run. After all, in investing, you get what you don’t pay for.

Robo-advisors use tried and tested methodology to invest client accounts in a diverse set of high-quality exchange traded funds (ETFs). Each low-cost ETF that robo-advisors invest in provide exposure to a certain market. By mixing these ETFs in an intelligent way, robo-advisors provide investment returns that in many cases exceed that of a portfolio that is managed by a traditional advisor. In addition, because of the globally diversified nature of robo-advisor portfolios, the volatility in these portfolios is often less than a portfolio concentrated only in Canadian and US investments.


How long have robo-advisors been around?

The first robo-advisor was founded in the United States in 2008. Since then, hundreds of robo-advisors have launched around the world. The first Canadian robo-advisor was launched in 2014.


What are the main differences between a robo-advisor and a traditional advisor?

Robo-advisors offer well-designed and globally diversified portfolio of Exchange Traded Funds. The professionals that are behind these portfolios usually meet the highest education and proficiency standards in the investment industry. More importantly, almost all robo-advisors have a fiduciary duty to act in the best interest of their clients.

An increasing number of traditional advisors are utilizing robo-advisors to the benefit of their clients. In these cases, a traditional advisor helps design a financial plan for clients and provides frequent updates and ongoing support. which a robo-advisor manages the client’s investment accounts.


Who are the main robo-advisors in Canada?

Here’s a list of the major robo-advisors in Canada, sorted alphabetically:

  • BMO Smartfolio
  • Just wealth
  • ModernAdvisor
  • Nest Wealth
  • Wealthbar
  • Wealthsimple

What if I need advice or want to talk to an advisor at a robo-advisor?

Some robo-advisors offer limited access to qualified financial and investment advisors. At ModernAdvisor, our clients have on-demand access to our team of registered portfolio managers and Certified Financial Planners. We don’t have a fancy office, and rarely do in person meetings with clients (even though we are more than happy to do so for clients who are local). We provide support and advice to our clients through online chat, on the phone or video call.


Safety of funds at robo-advisors

Any investments in stocks and bonds have risk. At a robo-advisor, the value of your investment will fluctuate as the stock and bond markets go up or down. Having said that, robo-advisors, similar to traditional wealth management firms, provide a high level of protection against fraud and even potential bankruptcy. Most robo-advisors in Canada use a large and established financial institution, called a custodian, to keep client accounts safe. Every client account is opened in their name at the custodian.

Using an independent custodian provides a very important level of protection to clients of robo-advisors. Because client accounts are kept in their name at the custodian, client funds will never be mixed with the operating funds of the robo-advisor’s business. Even if a robo-advisor goes out of business, client accounts stay intact at the custodian and can be cashed out or transferred to another institution.

Almost all robo-advisor clients in Canada have the Canadian Investor Protection Fund (CIPF) coverage on their accounts. CIPF is an insurance fund that covers up to $1M per client account in the event of bankruptcy or insolvency of a custodian.


Transferring an account to a robo-advisor

For many people, the process of moving from one investment advisor or firm to another might seem daunting. Robo-advisors have made this process very straightforward. When you sign up for an account at ModernAdvisor, you can initiate an account transfer, or a cash transfer from your bank right on your dashboard. It’s as simple as filling out your account number and answering a couple of questions about your existing account.

Most Canadian robo-advisors even offer to cover the transfer out fees you might incur to move you account from another institution.


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