Should I invest with a human or a robot? Traditional firms vs. robo-advisors

Investors considering where to park their money have a choice: go with a traditional financial adviser or trust in an algorithm.

Touted by online brokers as well as established financial institutions, robo-advisors are platforms that automatically invest users’ money — typically in exchange-traded funds.

Old-school advisers at banks and boutique firms can offer a more customized approach shaped by in-person chats, but at a higher price.

Here are the pros and cons of both:

Robo-advisors

Algorithm-driven portfolios demand lower fees and account minimums than their human counterparts and yield results that generally rise and fall with the stock market. These factors make them especially appealing to younger Canadians with smaller savings and a drawn-out investment timeline.

Typically, users fill out a questionnaire that assesses their financial goals, risk tolerance, income needs and expected retirement date. Then the provider — Wealthsimple and Questrade are two of more than a dozen mainstream services in Canada — pairs them with a pre-built portfolio based on their comfort level.

“A young client, let’s say, who’s coming to market for the first time, that’s an option to really consider if you’re basically starting out and you just want to get things set up and working,” said David Boyd, a senior investment adviser at BMO Nesbitt Burns.

The fees are usually calculated as a proportion of assets under management — the amount of money in the portfolio. They generally range between 0.3 per cent and 0.5 per cent, though Questradedips as low as 0.2 per cent for assets of $100,000-plus, while some can run as high as 0.8 per cent.

Most of the online brokerages that have cropped up since the late 1990s require no minimum amount to launch an account. Some auto-platforms associated with banks, such as BMO Smartfolio, have a $1,000 baseline.

“Robo-advisors provide what they need at a discount, which is one of the most obvious benefits of robos versus traditional bank investing, along with ease, time savings and convenience,” said Christine Socasau, who heads InvestEase, RBC’s robo-advisor.

But those who appreciate more guidance or have complex financial needs might want to go the traditional route, she added.

“You won’t ever sit down for a coffee with your robo-advisor across the table.”

Some platforms offer phone service for investment questions, but it’s less personalized than a one-on-one relationship.

Despite the allure of low fees, the robo-advisor market represents a sliver of the Canadian market at $26.4 billion in investments as of September, according to ISS Market Intelligence’s Toronto-based research firm Investor Economics. That compares with trillions of invested capital in the overall Canadian market.

To ensure their digital wealth manager is performing up to snuff, investors can compare their gains against major stock indices over one to three years, such as the S&P 500 or the S&P/TSX 60, said Tim Cestnick, a personal finance expert and CEO of Our Family Office Inc.

“You should be performing pretty much on par with those (indexes),” he said.

Traditional — i.e. human — advisers

Advisers of the non-digital variety can provide advice on demand, serving as the voice of experience and a sounding board to hash out financial priorities or dilemmas.

“You have a good financial quarterback — a live financial quarterback — in your corner,” said Boyd.

“In a world where the markets are moving quickly in both directions, you have a checkpoint where you can talk to someone about allocation … about making regular contributions, RRSPs versus (Tax-Free Savings Accounts).”

In-the-flesh wealth managers may be especially helpful for those with an array of financial considerations.

“I’ve got clients who used to live in Quebec and moved to Ontario, but they still have assets in Quebec, so it can get really complicated. And then if you’re a business owner, that’s even more complicated,” said Simon Préfontaine, a financial planner with Lafond & Associés.

For clients beyond their 20s or 30s, the “holistic” approach offered by advisers who also function as financial planners can be especially useful, said Cestnick.

“Financial planning advice should be integrated, meaning your retirement planning ties into your investment portfolio which ties into your tax plan which ties into your estate planning,” he said.

“If you’re looking for a broader plan, a robo-advisor is not the place to get that.”

The price of that wider, warmer, tailor-made approach is higher costs. Fees typically range between 1.5 per cent and 2.7 per cent, according to Préfontaine.

The minimum balance is often far higher as well. Moreover, managers of that money are subject to all-too-human flaws, such as bias.

“But the most common problem that we find with advisers is just poor performance,” said Cestnick, stressing that investors should check their would-be advisers’ credentials, fees, references and performance history.

“It’s more common than it is uncommon. And that’s partly because fees on the investment products themselves can be expensive.”

A mutual fund with a 1.5 per cent fee combined with a separate charge from the adviser can add up to 2.5 per cent in total fees, he said. “That’s a big number.”

Big bank or small boutique?

For those who see human beings as the more sensible option, the question remains as to where to seek them out.

Big banks offer myriad advisory divisions that vary based on investment size and type. Smaller assets may mean less access to a wealth manager as well as a narrower range of investment products.

For example, CIBC Wood Gundy requires a $100,000 minimum balance. “If you’ve only got under $100,000, then you have to go to the CIBC branch. And at the CIBC branch, they’ll only be distributing CIBC products,” said Préfontaine.

Before settling on a smaller outfit, investors should make sure it uses a third-party “custodian” for its clients’ assets, said Cestnick.

While Cestnick’s firm, which uses two custodians associated with National Bank and Fidelity Canada, can move money around within a client’s investment account, only the client themselves can put money in or withdraw it.

“You don’t want a Bernie Madoff situation. He ‘custodied’ his own clients’ assets.”

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