What’s the real value of a robo-advisor?

Currently all of our investments are in a balanced ETF fund with the robo-advisor—60% equities and 40% fixed income. We were very lucky with the timing and didn’t lose any money while transferring between investments.

I’ve written to you because although we have been satisfied with our robo-advisor, the markets are now in turmoil. With COVID, the war in Ukraine and now inflation taking a bite out of our retirement dollars, we are watching our investments in free fall and have nervously stayed invested. We can’t help wondering if there is anything else we should be doing to mitigate the effects on our ability to continue funding our retirement years and also leave something for our children.

—Judy

(Question has been edited for length.)

Investing during inflation, war and COVID

Judy, this is an interesting question because you are enjoying the benefits of the robo-advisor but at the same time you’re describing the shortcomings. 

As a financial planner, I often wonder about the attraction of a robo-advisor. I’d love it if you—and other readers—would add a comment below on what attracts you to one.

I am assuming you left your advisor to save on fees. Is there another reason?

In a follow-up email, you shared that your robo-advisor fees are 0.4% plus product fee, or management expense ratio (MER), and they are positioning themselves close to the middle, in between investing on your own and investing with an advisor.

Why work in the middle with a robo-advisor, where you pay 0.4% plus the MER? What are you getting for the 0.4%? 

Now, I don’t use a robo-advisor. So, I’m not clear about the services robo-advisors provide for the 0.4% fee, but I wonder if there is a better way. You could save on the fee by going 100% on your own with a self-directed account. You can purchase an all-in-one exchange-traded fund (ETF) with a low MER, assuming you have the investment knowledge. Or you can work with an investment advisor who uses passive investments—this would likely cost you about the same as the difference between the robo fee and your previous advisor’s fee. This could give you the peace of mind that comes with having an expert guide.

How do robo-advisors assess risk?

It sounds like you made the decision to move from an 80/20 equity/bond split to a 60/40 on your own and you didn’t really understand why the robo-advisor put your husband in the 80/20 portfolio.

When your husband set up his robo account, he likely completed a risk tolerance questionnaire, which directed him to an 80/20 split. He did not get there because your robo-advisor was moving money around to take advantage of opportunities. That is not permitted, and in my opinion, that’s a good thing.

Although it may seem logical to switch money around in pursuit of higher returns, and you may think that is what you’re paying your advisor to do, it doesn’t work. Yes, you may get lucky once or twice, but over the long term, market timing has proven unreliable. 

Is it worth saving fees with a robo-advisor?

Let’s get back to saving on fees. In Antti Ilmanen’s book Investing Amid Low Expected Returns, the author points out that fee consciousness is a good thing but it can go too far, and investors should think instead about fair fees. 

Ilmanen writes that low-fee investing pushes investors toward cash and index funds. And, I would add, it pulls them away from the benefits of financial planning, such as knowing you will be OK and that you will still have money to leave to your children.

Now, I am a big believer in index and passive investing, so I can’t knock that approach, but index funds represent traditional investing, in bonds and equities. For added portfolio diversification, non-traditional alternative investments might also belong in your portfolio. 

Times are changing, and so are investments

Like you mentioned in your email, Judy: “With COVID, the war in Ukraine and now inflation taking a bite out of our retirement dollars, we are watching our investments in free fall and have nervously stayed invested.”

As I write this, I’m seeing some bond funds that are down more than the indexed equity funds. That wasn’t supposed to happen.

Fortunately, alternative funds are showing positive returns, allowing retirees to arrange for draws from mortgage investment corporations (MICs), private credit funds or alternatives. This is what you hope for in a portfolio design: having at least one asset class with positive returns if and when other asset classes turn negative.

Unfortunately, alternative investments are available mainly through properly licensed advisors, and the fees are on the high side when compared to an indexed fund. I should also add that alternative investments come with their own set of risks, and they’re not for everyone.

Other strategies you can use while your investments are negative include drawing less, drawing from a line of credit, having a year’s worth of income set aside in cash, using guaranteed investment certificate (GIC) ladders, and more. These are generally things you would think about before markets turn negative, so consider them for the future.

Judy, thanks for this question, although I’m not sure I’ve really answered it. Just know we are all waiting for the markets to improve. I liked your question because it caused me to think, “What is the real value of a robo-advisor?” So, why not save the 0.4% and go self-directed on your own, or pay an advisor’s fees and have a thinking partner give you clarity about your future? 

Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at atlantisfinancial.ca or [email protected].

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• How does a spousal RRSP withdrawal work?
• Converting mutual funds: The benefits, the risks and the costs

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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