An investor's guide to robo-advisors 2018

For the 2019 guide to robo-advisors in Canada, go here.

When robo-advisors first burst on the scene a few years ago, they threatened to replace human advisors in situations where not much human help was needed. If you wanted more extensive human advice, you still had to pay up to go with a conventional advisor. Now there’s a formidable new trend emerging. Increasingly, robo-advisors are teaming up with human advisors in new and creative ways to provide “hybrid” combinations that achieve the best of both worlds. You get easy digital access and efficiency combined with whatever level of human expertise you need. You can expect to pay less in fees compared to amounts charged by conventional advisors. But often you also get more value from the advice because it can be concentrated where you need it most. “Hybrid is where the future is going and everyone is converging into it,” says Kendra Thompson, global lead for wealth management at consultancy firm Accenture. Of course, the trend is still in its early stages and you will only see hints of it in today’s robo-advisor offerings. (See the accompanying comparison tool below Which Robo-Advisor is Right for You Now for a guide to current offerings from seven leading robo-advisors.) It’s easy to get the misleading impression that robo-advisors are antagonistic rivals to human advisors. Fueling that impression are hard-hitting ads by robo-advisor Questrade Portfolio IQ, where everyday Canadian investors grill their sleazy-looking conventional advisors about why their fees are so high and their returns are so low. But it’s clear that algorithms won’t replace quality human advice in more complex or nuanced situations, at least any time soon. If you need a comprehensive financial plan or want help coping with a market meltdown, you’re likely to want to turn to a trusted human advisor with high levels of financial expertise but also human qualities like communication skills and empathy.

RELATED: Are robos right for young investors?

Key to the hybrid partnership is freeing up good advisors to provide value-added advice while using technology to: provide transparent online account access across multiple devices, streamline administration, and take care of routine transactions like rebalancing. Most robo-advisors recognize their own limitations and see good human advisors as potential partners. “We think advisors who are delivering value will continue to thrive,” says Wealthsimple CEO Michael Katchen.

Humanizing the robos

The hybrid trend has several aspects. Firstly, some robo-advisors themselves are adding more human services like basic financial planning and dedicated human advisors. But the larger, long-term trend is robo-advisors and other fintech companies teaming up with outside financial planners and conventional advisory firms in just about every segment of the investment advice business. Of course, the trend is still in its early days and much of the activity is behind the scenes. Nonetheless, Thompson points to a flurry of deals and huge sums of money that the major financial institutions are pouring into this area to show that the trend is unmistakable. “The type of transformation that is going on is unprecedented,” says Thompson. “The dialogue of robos vs. humans or old vs. new really misses the richness of what’s going on, which is an entire industry re-inventing itself to be more modern, more in line with what investors want to pay for, and to be more in line with the consumer experiences of today.” In one of the simpler forms of hybrid collaborations, independent financial planners are referring investments to a robo-advisor while providing over-all financial planning services. Typically the financial planner has online digital “dashboard” access to the account and incorporates portfolio information into their financial plans. While the robo-advisor retains full responsibility for managing the investments and matching the client to the appropriate portfolio, the financial planner might fill the role of trusted human advisor who can prepare an in-depth financial plan but also counsel clients about all aspects of their finances. That might include, for example, talking clients through their jitters during a market correction. The robo-advisor typically discounts their rates compared to what they charge regular clients because of reduced need for the robo-advisor’s services. With client permission, the robo-advisor may draw the planner’s fees from the robo-advisor investment account and remit them to the planner. Already hundreds of financial planners are working with robo-advisors in this way or something similar. (We’ll describe an example in a minute.)

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But there is much more to the hybrid trend than that. At a more complex but profound level, robo-advisors and other fintech companies are providing much of the technology to help major financial institutions transform their conventional advice businesses. These partnerships range from situations where robo-advisors provide their complete investment platform, process, portfolio design, and brand to other “white label” situations where the robo-advisor only provides the underlying technology and platform and the conventional financial institution partner does the rest. Because these transformations are so large and complex, they will take time and often start small with pilot programs in niche areas of the business, but no one doubts their potential. “Our vision is to become the platform of choice,” says Randy Cass, CEO of Nest Wealth, a robo-advisor in which National Bank Financial has a major investment. Nest Wealth is partnering with National Bank Financial to introduce hybrid capabilities at the bank and has also cut hybrid-type deals with three other conventional advisory firms. Meanwhile, the Bank of Montreal’s BMO SmartFolio robo-advisor offering is available alongside full-service brokerage accounts in its BMO Nesbitt Burns division. In the right client situation, BMO SmartFolio allows brokers to spend less time on administration and reviewing client accounts, and more time on value-added activities like financial planning and estate planning, says Silvio Stroescu, head of digital investing at BMO Financial Group.

RELATED: Wealthsimple launches savings account with premium rate

And while Wealthsimple hasn’t publicly specified how it might help transform Power Financial Corp.’s diversified financial services empire, the fact that Power Financial has acquired a controlling stake in Wealthsimple at least indicates interest if not intent. Other robo-advisors such as Invisor, Justwealth and WealthBar have also announced hybrid deals of varying size and significance.

Not just for millennials

Meanwhile the robo-advisor’s traditional direct-to-consumer offering continues to evolve. Many of the features that were novel a few years ago are more commonplace today. That includes:

digital access and communication through multiple devices;
construction of largely passive portfolios using low-cost ETFs;
online questionnaires that match new clients to the most appropriate portfolios for their circumstances;
paperless account initiation or “onboarding” process;
automated rebalancing of portfolios; and
availability (in most cases) of highly qualified portfolio managers working to a fiduciary standard to step in and provide limited human advice when needed.

Robo-advisors were originally thought to appeal particularly to millennials because of the demographic’s early embrace of digital technology, but the focus has shifted more towards older investors with larger balances. While some robo-advisors have gone after an older clientel from the get-go, others have more recently added features that are likely to have particular appeal to this group, like basic financial planning, tax-loss selling and portfolio managers dedicated to specific clients.

WATCH: Should I use a robo-advisor?

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Wealthsimple

Wealthsimple* is the industry market share leader and millennial robo-advisor of choice with its cool marketing vibe, youthful executives, and socially responsible investing (SRI) options. But it introduced Wealthsimple Black for clients with balances over $100,000, providing lower fees, tax-loss harvesting and basic financial planning. CEO Katchen says that Wealthsimple Black is the fastest growing segment of its business and that the firm has seen its average over-all client age shift to 34 from 29 a few years ago. The company has more than 80 per cent of Canadian robo-advisor users as clients, according to Strategic Insights data cited by the company. It has also expanded to the U.S. and Britain. Wealthsimple announced in March that it had reached $2 billion in client assets and 65,000 clients, with the “majority” in Canada. It is the only Canadian robo-advisor to release client figures.

RELATED: Wealthsimple launches investment portfolio for observant Muslims

WealthBar

WealthBar has always designed portfolios to generate cash flow and reduce volatily, features of particular appeal to older investors. But it has added services like dedicated advisors and basic financial planning reviews by certified financial planners. Its average client age now is about 48, says WealthBar CEO Tea Nicola. In addition to ETF-based portfolios, WealthBar also offers pooled funds in specialized asset classes like real estate, a product usually only available to large account clients at conventional advisors. “We democratize a high net wealth way of investing,” says Nicola.

Justwealth

Justwealth strives to appeal to older investors with larger balances by taking a relatively sophisticated approach to managing portfolios. Instead of providing six to 10 set portfolio options, which is typical, it provides 65. That allows it, for example, to offer distinct non-registered portfolios which use tax-advantaged ETFs and emphasize asset classes with relatively favorable tax treatment. Furthermore, it provides personalized (rather than robotic) tax loss harvesting. Justwealth also offers RESP target date portfolios that become more conservative as the beneficiary gets closer to needing the funds in university. Justwealth’s average client age is the mid-40s, says President Andrew Kirkland.

Nest Wealth

Nest Wealth has always gone after an older, richer demographic from the get-go with a fee structure that makes it comparatively cheap for exceptionally large accounts. Its average age is 47. Says Nest Wealth CEO Randy Cass: “We were always thinking those that were suffering the most pain weren’t the ones who had one, two, three thousand dollars and were just starting out, but were the ones who had 50,000, 100,000, 200,000 or more dollars and were getting defaulted into really high fee products that weren’t in their best interest.” Robo-advisors are also adding new products to broaden their appeal. Invisor uses a goals-based approach with tracking against goals for investments, but uses much of the same information to also identify insurance needs. Life insurance can then be obtained online, while the company is also developing online capabilities for critical illness and disability insurance (which are currently offered offline). “It’s all related,” says Invisor CEO Pramod Udiaver.

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In April, Wealthsimple introduced a high-interest savings account paying an impressive 1.7% annualized interest (not an introductory rate) with no minimum account balance and no withdrawal fees. Several robo-advisors are going after group RRSPs for small and medium businesses. In the first three months of 2018, Nest Wealth signed up 200 employers after launching group RRSPs with three corporate partners. WealthBar also offers insurance and has a group RRSP offering with about two dozen employers. While robo-advisor benefits aren’t just about costs, low fees are obviously a huge part of their appeal. Pretty much every robo-advisor does a fee comparison on their website which shows you can save a bundle in fees compared to investing with a conventional advisor using mutual funds. But comparing regular robo-advisor offerings that provide very limited advice with full-service mutual fund advisors isn’t an apples-to-apples comparison since the advice level isn’t generally comparable. (As a side note, some robo-advisors do these fee comparisons without counting the fees embedded in the ETFs they use, which is misleading.)

Value in hybrids

But the thing about the new hybrid options is it allows you to save fees when the level of advice is comparable or maybe even higher compared to conventional advice. To see how, consider the example of Sandi Martin, a fee-for-service certified financial planner with Spring Financial Planning, who prepares comprehensive financial plans for clients nationwide from Gravenhurst, Ontario, and who is also co-host of the Because Money podcast. In her financial planning work, she collaborates with her client’s investments advisor, who manages the investments.

RELATED: Time to think about a robo-planner?

While she happily works with whichever investments advisor her clients use, she also maintains a list of recommended robo-advisors and low-fee conventional advisors for clients to choose from if they’re looking to make a change. (While some robo-advisors provide basic financial planning, expect comprehensive financial plans like the ones prepared by Martin will go into far greater depth.) Her recommended list includes robo-advisors Wealthsimple, Nest Wealth, and Justwealth, as well as low-fee conventional firms like Steadyhand, and Leith Wheeler. Here’s how fees for Martin and a robo-advisor typically stack up using the example of a typical middle class couple with an investment portfolio worth $300,000. Robo-advisors are usually willing to collect the planner’s fees for them from the investment account, but Martin chooses to bill clients directly for her services. While her fees vary according to client needs, Martin typically charges about $3,750 plus HST to prepare a comprehensive financial plan with a few years of follow-up monitoring and check-ins for a middle class couple with kids and reasonably straightforward planning needs. That seems like a big cheque to write, but clients don’t usually need a comprehensive financial plan every year, so in many cases it’s reasonable to think of its value as being spread notionally over, say, four years. That results in an annualized expense of $1,060 or 0.35% of assets once HST is incorporated. Robo-advisor fees including HST amount to $1,188 or 0.40% of assets (using Wealthsimple fees as an example). The fees embedded in ETFs used by Wealthsimple average about $750 a year or 0.25%. That brings the all-in annual fees for financial planning and investment management to about $3,000 a year or 1.0% of assets in this example. By comparison, a mutual fund advisor typically charges around 2.2% of assets per year on a balanced account, which works out in this case to $6,600 in actual dollars, or more than twice as much. Some mutual fund advisors give great financial advice and provide lots of value; others not so much. Some provide regular, well-constructed comprehensive financial plans as part of their services; others not at all. But the bottom line is the average mutual fund advisor is going be very hard pressed to provide equal value for the $6,600 in annual fees that they typically charge for a middle class couple like this compared to the value that Sandi Martin teamed with a robo-advisor can provide for $3,000 a year. And that is pretty clear evidence as to why the hybrid approach appears poised to transform the investment industry.

Which robo-advisor is right for you now

Select robo-advisors to compare:

BMO SmartFolio

Invisor

Justwealth

Nest Wealth

Questrade Portfolio IQ

WealthBar

Wealthsimple

What they are known for

First big bank robo-advisor. Pioneer at introducing robo services into conventional brokerage channel. Majority of clients come from internal bank referrals.

Goals based approach with tracking against goals. Integrates investments, insurance needs, with goals.

Sophisticated approach to constructing portfolios. Lots of human touches with dedicated portfolio manager financial planning, and personalized tax-loss harvesting.

Low fees for very large accounts due to capped fee structure. Among the most active robos in partnering with planners and conventional advisory firms.

The robo-advisor offering of a respected discount brokerage firm. Well-known ads show disgruntled investors grilling their conventional advisors about high fees.

Over-all approach fits needs of older investors with larger balances. Investment approach provides cash flow. Offers pooled funds, financial planning and dedicated advisors.

The market leader. Known for its appeal to young professionals, but has pricing and services to appeal to all ages and account sizes.

Investment approach

Passive-active hybrid. SmartFolio uses passive broad index ETFs but also "smart beta" ETFs and actively adjusts asset mix based on investment team's market view.

Largely passive approach using broad index ETFs, with some use of "smart beta" ETFs.

Largely passive approach using broad index ETFs, with some us of "smart beta" ETFs for features like low volatility.

Classic passive approach. Nest Wealth uses broad ETFs with very low MERs and does not vary asset allocations to try to time markets.

Passive-active hybrid. Questrade uses passive ETFs for "core" positions, and supplements with "smart beta" or active ETFs. It adjusts asset mix based on investment team's market view.

Passive-active hybrid. WealthBar views approach as broadly passive, but emphasizes volatility management and cash flow. Offers choice of pooled funds as well as ETF portfolios.

Largely classic passive approach, using broad ETFs with low MERs.

Corporate connections

Part of BMO Nesbitt Burns and affiliated with Bank of Montreal. They use BMO ETFs.

Independent.

Minority investments by National Bank Financial and Metroland media.

Part of Questrade, the largest non-bank discount brokerage firm.

Affiliated with Nicola Wealth Management, a well-known money manager for large accountholders.

Controlled by Power Financial Corp, which has invested $165 million.

Highlighted innovation

Clients can have SmartFolio account alongside BMO discount brokerage and full service brokerage accounts, viewed in a common roll-up.

Online life insurance offering linked to goals, financial situation, and investments.

Offers target date RESPs that gradually get more conservative as the beneficiary gets closer to needing the funds in university.

Robo-advisor fees for large accounts are capped so you don't pay more as your balance grows. Generally cheapest robo-advisor if you have more than $500,000 to invest.

Can invest in robo-advisor account alongside discount brokerage account and move money back and forth.

Access to real estate and other less common asset classes through pooled funds offered by Nicola Wealth Management.

A high interest savings account that pays 1.7% annualized interest with no balance requirement.

Type of investment pros who advise clients ¹

Investment advisors

Portfolio managers (fiduciary standard)

Human advisors dedicated to each client?

No, but tries to route inquiries to familiar advisors.

Yes.

No.

No. But clients can ask for familiar advisor.

Yes.

Basic Financial Planning offered?

Available through bank branches or full-service brokers.

No, but goals-based investing has a planning aspect.

Yes

No.

Online financial plan, reviewed by certified financial planner.

Yes, for clients with $100K+

Non-core robo-advisor products

Insurance (life, disability, critical illness). Offers group RRSPs.

Group RRSPs.

Group RRSP offering (with three partners) signed up 200 companies in first three months of 2018.

Insurance. Group RRSPs (used by two dozen companies). Pooled funds. Socially responsible investing (SRI) option.

High-interest savings account. Group RRSPs. Socially responsible investing (SRI) and halal investing options.

How is balance calculated for determining fee tier? ²

Per household.

Not applicable.

Per household.

Per individual client.

Per household. (Can also link with friends)

Per household

Per individual client.

Effective minimum account size

$1,000

None

$5,000

None

$1,000

None

Combined annual fees for $5,000 account ³

$49 (1.0%)

$35 (0.7%)

$72 (1.4%)

$43 (0.8%)

$16 (0.3%)

$38 (0.7%)

Combined annual fees for $100,000 account ³

$975 (1.0%)

$700 (0.7%)

$750 (0.7%)

$710 (0.7%)

$963 (1.0%)

$890 (0.9%)

$750 (0.7%)

Annual fees for couple with $500,000 total in four accounts. ³

$4,225 (0.8%)

$3,500 (0.7%)

$3,750 (0.7%)

$2,970 (0.6%)

$4,193 (0.8%)

$3,870 (0.8%)

$3,450 (0.7%)

Fee structure

$0–$100K:	0.7%
$100K–$250K:	0.6%
$250K–$500K:	0.5%
$500K+:	0.4%
EFT MERs:	0.2%–0.35%

Flat:	0.5%
ETF MERs:	0.13%–0.21%

$0–$500K	0.5%
$500K+	0.4%
ETF MERs:	0.15%–0.25%
Minimum fee if assets less than $25K

$10K–$75K:	$20/mo.
$75K–$150K:	$40/mo.
$150K+	$80/mo.
Avg. ETF MER:	0.13%
Plus custodian & trading fees

$0–$1K:	0%
$1K–$100K:	0.7%
$100K–$250K:	0.6%
$250K–$500K:	0.5%
$500K–$1M:	0.4%
$1M+	0.35%
ETF MERs:	0.21%–1.25%

$0–$5K:	0%
$5K–$150K:	0.6%
$150K–$500K:	0.4%
$500K+:	0.35%
ETF MERs:	0.26%–0.34%
Pooled Fund MERs:	0.83%–1.22%

$0–$100K:	0.5%
$100K+:	0.4%
ETF MERs:	0.2%–0.3%

Hybrid partnerships with financial planners and conventional advisory firms.

SmartFolio is available through conventional BMO brokerage advisors.

Partners with a financial education company, a firm of insurance advisors, and a firm of planning-focused mutual fund advisors. In use with more than 100 advisors.

In use by independent financial planners. Partnering with Vexo Technology Solutions to develop platform for mutual fund advisors.

Nest Wealth Plus in use by independent financial planners. Partnering with conventional firms: National Bank Financial, Credential Financial, MD Financial and Aligned Capital Partners.

Considering opportunities.

Partnered with PPI to launch robo service for independent advisors primarily in insurance in January, 2018. Signed up 250 advisors within two months.

Wealthsimple for Advisors in use by independent financial planners. Offers advisors expanded menu of investments including active funds as well as passive ETFs.

1. Robo-advisors using portfolio managers may also rely on associate portfolio managers.

2. When on a per household basis, accounts aren’t necessarily linked automatically and may require taking the initiative to link them.

3. Fee tabulations include fees charged by the robo-advisor and management expense ratios for ETFs in the robo-advisor portfolios. In the case of the couple example with $500,000, each spouse assumed to have $200,000 in an RRSP and $50,000 in a TFSA. For BMO SmartFolio, the ETF MER used in fee estimates is based on range mid-point of 0.275%. For Invisor, typical ETF MER of 0.2% used in fee tabulations. For Justwealth, average ETF MER of 0.25% is used. Justwealth minimum fee is $4.99 per month if household assets are less than $25,000. For Nest Wealth accounts with less than $10,000, amounts are invested in a balanced ETF or fund with an MER typically around 0.85% and no Nest Wealth fees are applied. Nest Wealth accounts with more than $10,000 use ETFs with average MERs of about 0.13%. On Nest Wealth accounts with more than $10,000, Nest Wealth charges a custodian fee of $100 per year per registered account (first account for each individual client is free) and trading fees up to a maximum of $100 per year per individual client (maximum is assumed). For Questrade, ETF MER used in fee tabulations is 0.27% which applies to a balanced portfolio. For WealthBar, ETF MERs used in the calculation is 0.32%, which applies to a conservative ETF portfolio. Fees for a pooled fund portfolio would be much higher. For Wealthsimple, ETF MER used in fee tabulation is 0.25%, the midpoint in the range. Wealthsimple fee tabulation does not include waiving of fees for initial year for first $5,000 of assets.

4. The classic passive approach is based on ETFs that reflect broad market indices, such as the S&P/TSX Composite Index in the case of Canadian stocks. “Smart beta” ETFs (also called “strategic beta”) select stocks based on specific factors like low-volatility, or high dividends, or value.

LEARN ABOUT ETF ALL-STARS 2018:

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