If I’m going to talk about robo advisors, I need to start by clearing something up.
These firms do not employ robots. They do not use advanced artificial intelligence
or machine learning to build your portfolio or give you advice. Robo advisors are simply pared
down wealth management firms that allow you to easily open an investment account
and choose an appropriate portfolio online without speaking to a human.
While they may not be employing super-intelligent robots,
these firms are using technology extremely well to reduce the amount of human contact that their
customers need. Leveraging technology to reduce the need for humans allows robo advisors to keep
their fees low compared to traditional mutual funds and fee based financial advice firms.
So far this sounds pretty good: Ease of use and low fees due to
great technology. And it is pretty good, but, as always,
it is important to look past the flashy marketing and consider some important factors.
I’m Ben Felix, Associate Portfolio Manager at PWL Capital. In this
episode of Common Sense Investing, I’m going to tell you about robo advisors.
Canadian investors are starting to understand that high fees and commissioned mutual fund
salespeople are not good for their financial health. Investors seeking low-cost index fund
portfolios have an increasing amount of choice in Canada. Through The Canadian
Couch Potato blog, my PWL Capital colleague Dan Bortolotti popularized the idea that you
could manage your own investments using ETFs or index mutual funds.
For investors with more complicated situations, there are full-service wealth management firms
using low-cost index funds, like PWL Capital. Robo advisors fall somewhere in between.
Many people value a relationship with a professional wealth manager. This may be
due to the complexity of their situation, the magnitude of their assets, or their level of
comfort with financial markets. In any case, those people tend to be comfortable paying the
fee associated with a full service wealth management firm. Despite their lower fees,
I do not believe that robo advisors are an attractive alternative for these people.
For anyone with a simple situation, the choice between the DIY route and using a
robo advisor takes some consideration. We are really weighing the cost against value of the
fee that robo advisors charge, so let’s think about exactly what value they are providing.
There are a lot of different robo advisors in Canada with slightly different fees and
service offerings, so to keep things simple, I am going to use Wealthsimple as an example.
They are the largest and probably best-known robo advisor in Canada.
They charge zero point five percent of invested assets on the first $99,999,
and zero point four percent of assets on assets over $100,000.
Before I continue I want to clarify that I am in no way affiiliated with Wealthsimple.
Wealthsimple implements and rebalances your portfolio for you. This is one of
the biggest hurdles for many investors. As simple as buying ETFs can be, Wealthsimple
makes it easier. Keep in mind that waiting for a year to start your DIY portfolio because you
got busy is likely to cost you, on average, far more than Wealthsimple’s fee. If you can’t take
action yourself, then there is value in the ease of use that Wealthsimple has created.
I believe that a good amount of this value was eroded when Vanguard recently came out
with their one-fund solution ETFs in Canada. Buying one single self-rebalancing ETF is
potentially less intimidating than needing to buy three or more ETFs
to build a well-diversified portfolio. My PWL Capital colleague Justin Bender
has also made YouTube videos that walk you through the steps of purchasing an ETF.
Wealthsimple tracks your adjusted cost base in your taxable accounts. This is a somewhat tedious
task that DIY investors have to deal with. My PWL colleague Justin Bender has written
a guide on how DIY investors can track their adjusted cost base. It is not rocket science,
but it is a thing that a DIY ETF investor has to do. If you only have RRSP and TFSA
accounts then there is no value here. If you have taxable accounts there is some value.
Wealthsimple harvests your tax losses. This is only available to Wealthsimple Black customers who
are required to have over $100,000 invested. Tax loss harvesting is maybe a good thing for people
in certain situations. It only matters if you have a taxable investment account. Maybe there is some
value here, depending on the situation, but a DIY investor could easily harvest their own losses.
Wealthsimple Black customers also get a complimentary Priority Pass membership which
lets you into airport lounges. That’s kind of neat I guess, but also a gimmick. No real value there.
Wealthsimple invests your monthly contributions. This is very convenient.
ETFs have to be purchased like a stock, making it a bit of a hassle for a DIY
investor to set up a regular monthly contribution. They will have to log
into their brokerage account monthly to buy more ETF units. There is a bit of value here,
but if this was the main reason to choose Wealthsimple then something like the TD e-Series
mutual funds are a slightly less expensive alternative that offers the same convenience.
Finally, the one thing that Wealthsimple provides that I believe could be truly
valuable is access to financial advice. Basic advice is available to all customers. You can
speak to a Wealthsimple advisor by phone or by email. As far as I can tell they are
fairly accessible and responsive. You do not get a relationship with one advisor.
Wealthsimple Black customers get access to financial planning sessions. Great, advice
is accessible by phone and email. The question that follows is what is the quality of the advice.
I am in no position to comment on the quality of advice that Wealthsimple
provides. I have no experience with them as a customer. What I do know is that
they announced in March 2018 that they had reached 65,000 customers. As of June 25th,
2018 The Canadian Securities Administrators National Registration search shows that
there are ten people employed by Wealthsimple who are licensed to give investment advice.
That’s over 6,500 clients per licensed advisor. If their advisors worked 40 hours per week and
took no vacations, they could spend about 19 minutes thinking about each customer,
if they spent all of their time thinking about their customers. This is not necessarily a bad
thing - it is a byproduct of their low-cost business model, but it should be considered when
comparing Wealthsimple to a DIY approach. I would not choose Wealthsimple for the advice alone.
Speaking of financial advice, one thing have I have noticed in talking to Wealthsimple customers
is that Wealthsimple’s automated portfolio recommendations tend to be on the conservative
side. Wealthsimple customers who know little about investing are answering a handful of questions
and being placed into a portfolio by a computer program. It makes sense that the program would
tend to be more conservative than aggressive to protect both the customer and Wealthsimple.
I’m not saying that everyone should invest in a 100 percent equity portfolio,
but in my experience a simple conversation about risk [link to my risk video?] often
leads to a higher risk tolerance. Asset allocation is one of the most important
drivers of returns. If robo advisors’ algorithms tend to place investors in
more conservative portfolios, there could be a substantial implicit cost to their customers.
I do not want to come across as being negative toward robo advisors in general,
or Wealthsimple specifically. I think that robo advisors are a great alternative to expensive
actively managed mutual funds, but it is important to weigh the costs against a DIY approach.
Regarding Wealthsimple, I would not say that they are providing so much value for their fee that it
is obvious that everyone should invest with them, but I think that they are a good option
for people with simple situations who do not need in-depth advice, want to be completely hands-off,
and don’t mind paying a fee. On the other hand, with great resources online like The
Canadian Couch Potato blog and Justin Bender’s DIY Investing YouTube videos,
I do not think that DIY investing is out of reach for anyone. This is especially
true since Vanguard's new all-in-one ETF portfolios came on to the market.
What do you think? Wealthsimple or DIY? Tell me why in the comments.
Thanks for watching. My name is Ben Felix of PWL Capital and this is Common
Sense Investing. I’ll be talking about a new common sense investing topic every two weeks,
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