Robo Advisors: Investor Friend or Foe? - YouTube

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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