Since 2014, around 15 robo-advisors have emerged in Canada, managing combined assets of approximately $8 billion at the time of this writing. These are small assets compared to those invested through Canadian online brokers ($422 billion) and through Canadian mutual funds ($1.6 trillion). Despite this, Canadian robo-advisers are popular with young people because they allow small amounts of money to be invested in the stock market at a low cost, without any investment knowledge. What’s more, there’s no need for an in-person visit or to call some customer service line – account opening is done entirely online.
Robo-advisors are therefore presented as an alternative to financial advisers. Contrary to popular belief, however, money placed with a Canadian robo-advisor is not managed by a computer. They are indeed human portfolio managers in the flesh who manage the portfolios offered by robo-advisers.
Canadian robo-advisors are very similar. Most of them offer portfolios made up of similar index ETFs, and will therefore have similar returns. So the first criterion to consider should be the costs, although other factors could influence your decision. Before using Hardbacon’s robo-advisor comparison tool to choose the one that best suits your needs, you should ask yourself the following questions:
What fees do robo-advisers charge?
The main difference between the various robo-advisors is their fees. Our comparison tool shows you them so you can easily predict how much you will pay in management fees for each robot advisor. While a client can expect to pay between 2% and 3% of their assets in fees each year when investing in mutual funds, with a robo-advisor this fee will generally be less than 1%. Of course, unlike a financial advisor, a robo-advisor does not provide human support or personalized advice.
Going for the cheapest robo-advisor is more difficult than it looks, since there are two types of fees with similar names to consider.
Robo-advisor management fees
This is the fee that all robo-advisors advertise. This generally hovers around 0.5% of assets under management. So for $10,000 invested for one year with a robo-advisor that has a 0.5% fee, you will pay $50 in fees. This amount will be deducted from your assets in a transparent manner. These are the fees with which robo-advisors pay their employees, advertising campaigns, etc.
The average management expense ratio (MER) of robo-advisor portfolios
This fee is often ignored by those who invest in robo-advisors and not something they advertise. These fees are charged by the Exchange Traded Funds (ETFs) in which the robo-advisors invest, and go into the pocket of the fund administrators, not the robo-advisor. Also, these fees are deducted directly from the ETFs, so you will not see them withdrawn from your account with the robo-advisor.
The MERs of the major portfolios offered by Canadian robo-advisors generally range from 0.2% to 0.35%, although higher MERs may be charged by specialized ETFs. For example, the MER % usually increases when choosing a portfolio of socially responsible ETFs.
As the MER varies from portfolio to portfolio, the only way to accurately determine the total fees you will pay on your investment with a robot would be to call to find out which portfolio MER has been offered to you. If you are good at math, you could jot down your portfolio’s makeup, research the MERs of each of its component ETFs, and calculate a weighted average of those fees.
Another way would be to go look at the MER range displayed in Hardbacon’s robo-advisor comparison tool, and add it to the management fee.
For example, the average MER for Wealthsimple portfolios is 0.20%. Wealthsimple’s management fee is 0.5% if you invest between $0 and $100,000. Therefore, you should expect to pay around 0.70% of your assets under management in fees, which is still much cheaper than what you would pay with a financial advisor (but without getting services) and more expensive than if you opted for to invest in ETFs on your own through an online brokerage account.
To be a little clearer, we could compare the robo-advisor fee structure to an orange. The management fee represents the cost of having access to this orange. Inside the orange, there are several quarters, each representing a different ETF and each with their own management expense ratio.
What kind of investor are you?
Most robo-advisors invest only in ETFs. However, some robots have extended their asset offerings to mutual funds and other investment products. Steadyhand is one of the few Canadian robo-advisors that offers only mutual fund portfolios and therefore has higher fees. Mutual funds are often actively managed in an attempt to achieve better returns, but must charge higher fees to compensate for their work.
CI Direct Investing, formerly known as WealthBar, offers private equity products, in addition to traditional ETF portfolios similar to those offered by other robo-advisors.
One type of portfolio that has been gaining popularity recently is one that invests in socially responsible ETFs. If you are concerned about where your money is going and are looking for portfolios that align with your beliefs, you should know that there are bots with portfolios designed especially for you. Wealthsimple, CI Direct Investment and ModernAdvisor are among these.
Wealthsimple and CI Direct Investment also offer Halal or Sharia-compliant investment portfolios that are intended for those who wish to invest while respecting the principles of the Muslim faith, which prohibits the payment of interest and certain business sectors such as alcohol and adult entertainment.
Do you want your robo-advisor to be integrated into your brokerage account?
If you’re not the type to spread yourself too thin and you like managing your investments from a single platform, you can. Several Canadian robo-advisors are integrated into brokerage platforms. This is notably the case of Portfolio IQ, which is part of the Questrade platform, of InvestCube, which is part of the National Bank Direct Brokerage platform, and BMO SmartFolio, which is part of the BMO InvestorLine platform.
Which robot advisor should you choose?
After you’ve done all of your homework and used Hardbacon’s Robo-Advisor comparison tool, there may be more than one robo-advisor charging the same fees and offering the type of portfolio you seek. If so, choose the one that offers the most convenience, as the easier it is for you to check your balance and make transfers, the greater the likelihood that you will be depositing money there on a regular basis. In fact, several robo-advisors offer automatic savings programs.
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