The rise of robo-advisors?
If you know me you know I am a big fan of robots. Google driverless car? I am in. Bread machine? You can bet on that (and here in Quebec they are called bread-maker robot). We even have a Roomba that vacuums our floors from time to time (and we paid only $70 for it, second hand, of course). A robo-thermostat is on my wish list, and so on.
So the idea of robo-advisors is a no-brainer for me.
Quick recap: what are robo-advisors?
Robo-advisors are a relatively new class of financial services, where machines automate part of your investing job. They blend the facility of index investing with some more diversified strategies of the “normal” investing, but with a fraction of the cost. While investing with a regular financial advisor or even with your bank will cost you an average of 2.2%/year, robo-advisors fees can be as low as 0.2%. While the fees themselves are not the only factor to weigh in when choosing where and how to invest your money, paying more fees can hurt your retirement badly, as Barry from Money We Have has beautifully showed in this post about Management Expense Ratio (basically, investment costs).
Right now in Canada we have a bunch of robo-advisor services available. You can check some of them and their fees in one handy sheet published by my friend Sandi from Spring Personal Finance clicking here.
A Wealthy Bar
This week I had the pleasure to listen to a presentation given by WealthBar’s CEO Tea Nicola. WeathBar is one of the robo-advisor companies operating in Canada. They are from
Alberta Vancouver and are now entering the Quebec’s market (you know, with the French language requirements and everything), and then they invited some people over for a very pleasant evening of wine and wealth. Sweet! It’s nice to see something financial-related happening in Montreal (and Quebec in general) :)
I got to talk to Tea about the Quebec’s market, WealthBar investment strategies, some specific questions related to their website and business and she ran a quick demo for WealthBar’s system and website, demoing from the sign-up process to the dashboard and all the calculators and graphs their clients have available.
Some of my impressions
On sign-up every client answers a quick questionnaire. And when I say quick I mean something like 4 or 5 questions. The goal is to find your risk tolerance and then match you with one of the available portfolios.
One thing that I found very interesting was that you can have a different risk tolerance for each one of your accounts. Since your RRSP and your TFSA will likely serve different purposes, it makes sense to be able to have different performances for different accounts.
Laws in Canada don’t allow any company to use mathematical algorithms to manage investment funds or your money. So what will a robo-advisor do with your money?
To answer this question we must understand a very simple and basic principle of investing: rebalancing. Simply put, rebalancing is to make sure your money is correctly distributed among all the categories your portfolio is made of.
Bring the metaphors in!
Imagine your portfolio is made of rabbits and elephants. 60% rabbits and 40% elephants (for some reason). Well, we all know rabbits reproduce at a much faster rate than elephants. At some point you count your rabbits and your elephants and discover that your portfolio is now composed of 80% rabbits and only 20% of elephants. Rebalancing is selling the rabbits and buying more elephants until you have the 60/40 proportion again.
As you can imagine, soon this buying/selling task will become tedious and cumbersome. This is what a robo-advisor will do for you: it will make sure your portfolio is always balanced at that initial proportion (we call it asset allocation, but we’ll talk about it another time).
But who choose the animals that will be in your portfolio? What happens if instead of rabbits I like squirrels more? Well, in this case you are out of luck. WealthBar animals are chosen by a team of experts and the final mix is what they think will behave better, according to their knowledge and theories. But, if you stop to think about it, it’s the same thing when your finance advisor or your bank manager push you some magical fund.
Of course that with your financial advisor you can pick some different funds — I mean, animals — but then it’s up to you. If you are just starting with investing or just don’t want to be bothered by these decisions, then it’s ok to take their advice. And believe me: it takes a LOT of effort and knowledge to choose your own animals — I mean, investment funds. But, as I said before, beware of the costs!
I only scratched the surface of this world of robo-advisors. WeatlhBar is only one of the players in this field, and I really cannot recommend any of them because I didn’t try them all.
The goal with this post is to open your mind to new possibilities. It’s a big world out there! As I said before, personal finances are PERSONAL, so your needs and solutions will be different from mines, and they will be different from your neighbours’.
The only sure thing is: you MUST think about your future and invest your money. The sooner you start, the better. If you think you are not ready for that, or if you are struggling with anything money-related, give me a call and we can talk. I’ll love it!
Photo by Kyla Duhamel: Downtown Saskatoon