RISE OF THE MACHINES
Those with small nest eggs and little market experience drawn to simple online tools
Robo-advisers gaining favour with young people who are looking to start investing,
Like a lot of young people who want to start saving for the future, Rachel Jackson is interested in using a roboadviser — even if she’s not entirely sure how such digital investment services work.
For the 27-year-old office administrator in Parry Sound, Ont., roboadvisers sound appealing because they’re advertised as offering professionally managed portfolio advice at a relatively low cost. Equally enticing to her tech-savvy leanings is the fact that accounts can be conveniently set up through her smartphone within minutes.
Still, Jackson has some concerns — namely, how robo-advisers actually stack up against conventional fullservice advisers using mutual funds, and how much money she’ll need to get an account started.
“Since I’m young now and do not have an enormous amount of money, I think robo-advising is the best way for me to get into investing,” she said.
“However, in the future I am conscious that I may need to go toward a more personalized approach when planning for retirement and such.”
Jason Heath, a fee-only financial planner with Objective Financial Partners, says robo-advisers are a great choice for young investors who only require portfolio management for a specific savings goal and don’t need to get into the more personal aspects of wealth management, such as taxes and retirement or estate planning.
To set up an account, robo-advisers ask a series of questions to determine your savings goal and risk tolerance before creating a diversified portfolio using an appropriate mix of low-cost equity and bond exchange-traded funds (ETFs).
“The management fee the robo-advisers charge tends to be around the half-per-cent range because they build portfolios using ETFs, which is at least a third, or maybe even a smaller percentage, of what you’d typically pay with mutual funds,” Heath said.
Robo-advisers are also ideal for people who are attracted to ETF investing but don’t feel comfortable using a discount brokerage on their own, said Dan Bortolotti, an investment adviser with PWL Capital.
“A lot of people have read about ETFs and heard that they’re a low- cost solution. What they don’t realize is that to do it on your own, you have to learn to make trades on a stock exchange,” Bortolotti said. “A lot of people write it off but it’s difficult.
“With a robo-adviser, it’s virtually zero maintenance,” he said. “They’re a fantastic tool for asset allocation and rebalancing if that’s all you need.”
However, Bortolotti said, that’s not to say someone using a robo-adviser for portfolio management advice can’t also pay for the services of a fee-only planner to address concerns such as taxes or retirement planning.
“If you need ongoing planning, I think the robo-adviser model can be an excellent complement to a feeonly financial planner,” he said. “They can give you lots of great advice, but they can’t manage your portfolio.”
As for how much investment money you need to open a robo-adviser account, services such as Wealthsim- ple have no account minimums and charge no portfolio management fees on the first $5,000 invested.
“Think about someone who is 18 years old and just going to university, or starting out their first job at 20 years old, and maybe they’re saving some money in cash for a car downpayment or a house down-payment and they’ve got this little TFSA or RRSP with free investment management,” Heath said. “That’s pretty awesome.”