Robo-Advisor services - Pros and Cons
So I've recently found out about an interesting service, commonly called "robo-advisor". Apparently this kind of thing has existed in the USA for a few years, but it just came to Canada in 2014 I believe.
Basically, it's a portfolio management service that will do some form of automatic re-balancing on a fixed schedule. From that I've seen, seems like most of them help you build and maintain a portfolio of low cost ETFs.
ShareOwner - LINKY LINK Appears to be the largest and most established offering.
To me, a service like this could offer some value for someone who isn't going to actively manage their investment, and it would really assist in taking the emotion out of the equation, which can be a big problem for some people. I think most of the investors on Beyond consider themselves too sophisticated for this type of approach, but I expect some interesting insights.
I have attached some good summary articles.
Originally posted by The Canadian Press, May 01, 2014
Robo-advisers could pick your investments
Online advice by computerized program seen as accessible for new generation of investors
The future is here, and it includes robots managing your money.
Or, to be precise, robo-advisers: Programs that use an algorithm to help you determine what investments are best for you.
The thought of putting a computer in charge of your financial decisions may make some uneasy, but if you do your banking online, as well as buy groceries and set up dates, why not also receive financial advice over the internet?
That appears to be the thinking behind a field garnering a lot of interest in the U.S., and one which the president of the Investor Education Fund in Toronto says reflects the fact that younger generations are changing the way they interact with every marketplace.
Younger investors may like it
"It's natural to think that this may be a solution that works for them, because they're not coming to the marketplace with pre-conceived notions," said Tom Hamza.
"There may (also) be some skepticism lingering from major financial events that have happened in the last decade or so."
The robo-advisers take you through a series of questions to determine your goals and your risk tolerance and then build a diversified portfolio using passive investments like index funds and exchange-traded funds.
The automated financial advice is generated by software programs developed by specialized wealth management firms that take your information and run it through their calculators. Some rely solely on algorithms, others involve an online adviser or are a combination of both.
"These organizations can provide advice to clients at a very low price point, and they can serve a portion of the population that's been really under served, people who haven't had access to investment advice," said Robert Stammers, director of investor education at the CFA Institute.
Canadian brokers offer adviser service online
Robo-advisers are also generating buzz in Canada, although the concept has yet to be fully established here. Some Canadian brokerages are offering more online adviser services, but the U.S. has several small, quickly growing robo-adviser companies serving investors.
Wealthfront Inc., one of the biggest with more than $800 million in client assets, doesn't charge an advisory fee on the first $10,000 of assets under management. On amounts over $10,000, the monthly advisory fee is based on an annual fee rate of 0.25 per cent. Clients also incur the fee embedded in the cost of the ETFs owned, which averages about 0.17 per cent. Betterment, its biggest competitor, offers a management fee as low as 0.15 per cent, so both are below the roughly two per cent most traditional financial advisors charge.
But while financial experts think Canadian markets would benefit from a bigger robo-adviser presence, they also warn this new alternative doesn't come without risks.
There are questions around whether the software is sophisticated enough to asses a client's tolerance for risk and to adapt with changing markets, or to deal with investments that may become more sophisticated.
It's also unclear whether the tools these programs used to gather information are the most effective. A 10-question questionnaire about your risk tolerance and goals may not give the complete picture — and investors aren't always the best at assessing their own capacity for risk.
How to determine risk-tolerance?
"It's easier for an algorithm to determine someone's financial ability to take risk, but it's a whole lot more difficult to determine a client's emotional ability to take risks, and that's probably where a financial adviser has an advantage over a computer," said Stammers.
It may also be difficult for people to compare across these platforms because, as they are based on computer code, their inner workings aren't always clear.
Adam Molnar, a surveillance expert with Queen's University, said investors should also think about the security of their private information when looking to use this kind of software.
The exposure of the Heartbleed security bug that prompted the Canada Revenue Agency to shut down its website last month, he said, shows that "there is no such thing as perfect security."
While most companies will promise to take security seriously, customers can't independently gauge whether that's the case. They should really think about the kind of personal information they're putting up that risks being acquired and sold on the black market, he said.
"The issue is not that they're huge trades," said Molnar. "They're high volume, low margin trades in this kind of software. It's not so much about directing the money, it's about gaining stolen credentials that can be used in other parts of the Internet."
Ensure portfolio diversified
But if you can make the robo-adviser model work (and work safety) Hamza says, these "couch potato of portfolios" could be a great addition to the financial services industry because they would ensure your portfolio is diversified.
They would also take the focus away from day-to-day movement of stocks, a habit investors don't necessarily benefit from but find difficult to break.
"The whole perspective of these robo-advisers is that you're really focusing on the forest on not focusing on the trees," Hamza said. "It takes the conversation away from buying and selling this stock and it takes it away from the day-to-day looking at investments and tends to take a much bigger asset class viewpoint."
Originally posted by The Globe and Mail, Published Friday, Oct. 17 2014
Robo-advisers can offer hands-on advice, too
DAVID ISRAELSON
Robots now perform brain surgery, vacuum the living room, book the family vacation and soon may drive our cars, so why not use a robo-adviser to manage a financial portfolio?
Chris Nicola thinks it’s an idea whose time has definitely come. The 35-year-old Vancouver web developer has been working with the financial sector since he was 14, helping his family’s wealth management company with its tech needs.
He’s about to launch WealthBar, one of several computer-assisted financial management companies that have sprouted in Canada this year.
“Our official launch is Nov. 3,” says Mr. Nicola, who has been running the site in beta during the summer. He says he has been testing the site with about a dozen clients and has a list of about 800 additional people who have asked to be notified when WealthBar is up and running next month.
In addition to Mr. Nicola’s company, Canada’s financial scene – and the Internet – has seen the arrival of robo-competitors, most with compound names. They include Wealthsimple, Nest Wealth, Smart Money Capital Management and ShareOwner.
Robo-advisers are not necessarily 100-per-cent robotic, admits Mr. Nicola. But they are geared toward do-it-yourself investors who want minimal interaction with human financial advisers, as well as lower fees.
Mr. Nicola says his target customers tend to be millennial generation investors who are so comfortable with technology that they do pretty much every type of interaction in their lives online. “For them it’s almost an imperative. They don’t want to have to go into a bank and sign papers,” he says.
He finds another growing sector for robo-advice is aging baby boomers. “We’ve had a lot of people who have been taking the do-it-yourself route for a long time. They’re sort of at retirement age and they’re coming to us because they’d now like a more managed approach and the price is right.”
Robo-advisers are not the same as online discount brokerage sites run by the big banks.
“A discount broker is technically not allowed to advise the clients, who have to make all their own decisions. We are a fully licensed portfolio manager, so we can advise the client on everything from personal financial matters to their specific asset allocation,” Mr. Nicola says.
“What we want to do is provide a more efficient financial advisory relationship,” he adds. Mr. Nicola’s wife, Tea Nicola, a financial planner, will work directly with WealthBar’s clients who want more than a robot.
Canadian robo-advisers are also slightly different from their U.S. counterparts such as Wealthfront, Betterment, Personal Capital, FutureAdvisor, SigFig Wealth Management and Motif Investing.
For one thing, U.S. robo-advisers have been in business longer and are larger. Together they manage $4-billion (U.S.) in assets, according to Boston-based consulting firm Aite Group. Admittedly that’s a small portion of the $17-billion under management south of the border, but it’s growing fast; Wealthfront, launched less than three years ago, already manages $1.2-billion .
Another selling point for robo-advisers is that they will take on clients with small portfolios to get started in the investment world. Discount brokers offering no advice will do this too, but robo-advisers typically provide their clients with a menu of ETFs, so at least there’s a bit of guidance.
ShareOwner, for example, lets clients select one of its five model portfolios, or create their own from a list of nearly 50 ETFs. It will also automatically rebalance a portfolio if it moves up or down beyond a certain threshold chosen by the investor.
Mr. Nicola says that because securities regulations in Canada are slightly different than in the United States, Canadian robo-advisers also tend to offer more hands-on advisory services than their U.S. counterparts, which can be really stripped down.
In both countries, though, the services aim toward do-it-yourselfers by offering minimal face time – and lower fees.
“Our fees start at 60 basis points (0.6 per cent),” Mr. Nicola says. He compares this with a typical full-service brokerage fees that usually start at 1.5 per cent and veer upward to around 2 per cent.
“For people investing over half a million dollars we can offer fees of only 35 basis points (0.35 per cent). That’s even less than a high net worth adviser would charge,” he says. In the United States, robo-fees can be as low as 0.15 per cent of annual assets.
Robo-advisers keep their own costs low, Mr. Nicola says. “There can be human interaction, but we’re not playing golf with our clients or taking them out to dinner.”
He believes the industry is seeing only the beginning of a trend toward more and more automated investing.
“I don’t mind the term because it’s an easy way to understand it,” he says.
“We’re at the forefront – the more we can leverage technology and provide advice, the better results we’re going to see.”
Originally Posted by killramos
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