The first robo-advisor service to market in Canada is ShareOwner

Back in February I wrote about the rise of robo-advisors, the online services that allow you to build an ETF portfolio that’s maintained by a computer. These services are already operating in the US, and several are in the works in Canada, including the start-ups NestWealth and WealthSimple. But the first to market has turned out to be ShareOwner, a well-established firm better known to dividend stock investors. I wrote about ShareOwner more than four years ago, and my review at the time was quite negative. They charged a $79 annual fee for RRSPs, their trading commissions were on the high side, and their menu of ETFs was mostly confined to niche products. But the firm has a new owner in Bruce Seago (a veteran of the online brokerage business) and a revamped offering. Their newly announced Model Portfolio Servicehas a lot of promise for ETF investors seeking a low-cost, low-maintenance solution. Here’s an overview of how it works. When you open an account, you can select one of ShareOwner’s five model portfolios, or you can create your own from a list of almost 50 ETFs. The menu is dominated by plain vanilla, broadly diversified funds, including ETFs from Vanguard’s Canadian and US lineup, as well others from iShares and BMO. It’s also good to see only one to five choices for each asset class, so the options are not overwhelming. After you’ve selected your ETFs, you set a target allocation for each one. You also select rebalancing thresholds, which must be between 10% and 50% of the target. For example, you might choose a 30% allocation to the BMO Aggregate Bond Index ETF (ZAG) and a rebalancing threshold of 25%. Since one-quarter of 30% is 7.5 percentage points, the holding will be rebalanced if it falls below 22.5% or climbs higher than 37.5%. Once a month, all your idle cash—whether it’s from distributions or new contributions—is automatically invested in whichever asset classes are furthest from their target allocation. And if any asset class has drifted outside your thresholds, the algorithm will trigger a sale of an overweight asset class in order to rebalance the portfolio.

Unique features

There’s a lot to like about the ShareOwner offering. Let’ start with no minimum account size and no administrative fees. The annual cost is 0.50% of your portfolio’s balance on accounts up to $100,000, and a flat $40 per month on larger accounts. That all-in cost includes the scheduled monthly trades (if you want to make a purchase or sale immediately rather than waiting for the next monthly rebalance, a $40 commission applies). If you assume the management fees of the ETFs would average 0.25% and you make only the scheduled monthly trades, the all-in cost would be a very competitive 0.75% or less. If all you want is the ability to buy ETFs with no commission, you can already do that at Questrade orVirtual Brokers and avoid a monthly fee. But there is huge value in ShareOwner’s automatic rebalancing service. Even if they have the time and inclination, very few investors have the discipline to maintain their strategic asset mix. (How many were selling US stocks and buying bonds last year?) With the Model Portfolio Service, you can simply set up a preauthorized contribution and remove the need to make frequent decisions about where to deploy your cash. ShareOwner also has a unique feature that sets it apart from all other online brokerages: you can hold fractional shares. If you want to buy $1,000 an ETF trading at $21.87, you’d normally have to buy 45 shares for $984.15 and have $15.85 left over. But at ShareOwner you can purchase 45.7247 shares for exactly $1,000. No matter how small your account, you can add small allocations to asset classes such as REITs or emerging markets, which wouldn’t have been cost-effective if you were paying commissions and limited to buying full shares. Taken together, these features make ShareOwner’s Model Portfolio Service similar to building a customized index mutual fund.

How to make the most of it

If you’re thinking about using ShareOwner’s service to build a Couch Potato portfolio, I’ll make a couple of suggestions. First, the five model portfolios seem well designed on the equity side, with a good mix of Canadian, US, international and emerging markets, as well as REITs—very similar to what you’d see in my Complete Couch Potato. But I’m less enamoured with the fixed income ingredients, which include preferred shares, unhedged US bonds and emerging markets bonds. Your fixed income holdings should be about lowering a portfolio’s volatility, and those asset classes won’t accomplish that goal. I’d recommend using the customization feature and replacing these with investment-grade Canadian bonds only. Another caveat: ShareOwner, like most brokerages, does not allow investors to hold US cash in registered accounts. So if you include US-listed ETFs in your portfolio your money will be converted to US dollars with a built-in spread, which is not disclosed. For that reason, I’d suggest investors avoid US-listed ETFs altogether and stick with the Canadian equivalents. Finally, resist the urge to tinker. The Model Portfolio Service is remarkably flexible in allowing investors to switch from one portfolio to another at any time, and that can turn anyone into a market timer or a tactical manager. Investors would be better off sticking to their long-term targets and pretending that feature doesn’t exist. If any readers try ShareOwner’s service, please send me your thoughts or share your feedback in the comments section below. For more index investing ideas, visit Dan Bortolotti’s Canadian Couch Potatoblog.