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, so subscribe, and click the bell for updates.
