Robo-advisor or all-in-one ETF: which is best for new investors?

In my opinion, the best thing about the evolution of the investment industry is a (slight) increase in transparency. There is a long way to go, and consumers are still disadvantaged in a lot of ways, but we are making progress.

I am also of the opinion that not everyone should be a self-directed investor. Sure, it can be relatively easy, but having worked directly with thousands of clients during my career, I can also say that does not matter to some people who would never think of pressing the buy and sell button themselves. 

Investment professionals are better off working with clients who do not want to micromanage them. Conversely, investors who want to take control of their own portfolios have lots of tools at their disposal. I like to see everyone investing in the way most suited to their situation. Below, I explore two important innovations that have appeared over the past decade that can lower the cost of managing an investment portfolio for retail investors.

How ETFs changed the game

The first Canadian mutual fund was introduced in 1932, but it was not until the past 40 years that they became mainstream. The past 10 years have started to show a shift in demand from investors to exchange-traded funds (ETFs), but mutual fund assets still dwarf that of ETFs. In fact, though the ETF market is growing faster, the mutual fund market in Canada is still about five times bigger (about $2 trillion compared to about $400 billion).

An investor can build an ETF portfolio using individual components like a Canadian stock ETF, a U.S. stock ETF, a global stock ETF, and a bond ETF. They can buy ETFs that track stock market sectors and complement these ETFs with individual stocks.

There are over 1,100 ETFs in Canada with 40 fund sponsors and easy access to thousands of U.S.-listed ETFs as well.

The selection is enough to make your head spin and almost necessitates the use of an advisor to wade through the options. More and more advisors are using ETFs throughout their client portfolios, but a new class of ETFs may be better suited to self-directed investors. 

How to invest using all-in-one ETFs

Enter stage left the all-in-one exchange-traded fund, also known as asset-allocation or one-click ETF. The idea is simple: choose a single ETF that gives you access to all the asset classes an investor might need in a single product.

These ETFs are rebalanced regularly and reduce the oversight an investor might need if they buy individual asset-class ETFs, let alone individual stocks. 

The purchase and sale are easy for a saver or a decumulator compared to a portfolio with more individual components.

Even if someone wants to buy individual stocks in a larger account, an all-in-one ETF can work well for a smaller account like a registered education savings plan (RESP), for example.

I will repeat my opinion that not everyone wants to buy and sell their own investments, even if it can be as simple as a single ETF. That is where robo-advisors can fit in nicely.

How to invest using robo-advisors

Robo-advisors are portfolio managers operating primarily online that utilize technology to construct, monitor and maintain an ETF portfolio for investors. For a small fee, they add a layer of oversight to an ETF portfolio compared to buying all-in-one funds.

During onboarding, an investor answers questions relating to their risk tolerance to determine a suitable portfolio. Customer service might be lighter than a full-service advisor, but the trade-off is lower fees.

Portfolio management fees may be in the 0.5% range with another 0.25% in management expense ratios (give or take) for the underlying ETFs. At 0.75%, this is 50% or more cheaper than a full-service advisor for most investors.

Full-service advisors might provide financial planning and other services, with “might” being the operative word. Robo-advisors generally do not provide services beyond investment management. 

The other benefit of robo-advisors is that many financial advisors and companies have minimum investments that are relatively larger and may preclude smaller investors from working with them. 

How to choose between robo-advisors and ETFs

Like most financial planning decisions, there is no right or wrong answer when it comes to using ETFs in the first place, let alone whether to buy an all-in-one ETF or use a robo-advisor. There are more appropriate and less appropriate choices depending on an individual’s circumstances. 

It does not need to be all or nothing, either. An investor who one day hopes to transition to being a self-directed investor can always start with a robo-advisor if they’re unsure. They can then spend a couple years getting more comfortable with ETF investing and transfer their portfolio in kind (as is) to a self-directed account. Some may be perfectly happy paying 0.5% to a robo-advisor. And over time, technology and scale may result in further fee compression as well, making the cost more comparable.

More about investing:

• What to do if you over contributed to your RRSP
• The MoneySense ETF Screener
• Best robo-advisors in Canada for 2024
• Best ETFs in Canada for 2024

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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