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Dec 27, 2014

The Robo Invasion

by Richard Morrison

Richard MorrisonIf you don’t have the confidence to select your own investments at a discount brokerage but you don’t want to pay the fees of a full-service advisor, there is a middle ground: the robo-advisor. There are several robo-advisor services available to Canadians, offering more guidance and management than discount brokers, but less advice than full-service brokers. Robo-advisors have lower fees than their full-service brethren and are willing to take on clients who have smaller accounts—two points that give them a promising future.

Some purely automated services in the United States deserve the term “robo-advisor,” but this description

does a disservice to Canadian firms that go beyond automation to offer genuine human interaction. Product differentiation and brand awareness would seem to be a bigger problem than labeling, however, as three Canadian firms—Nest Wealth, WealthBar and Wealthsimple—have the word “wealth” in their titles (perhaps inspired by an early robo-advisory service, Palo Alto, Calif.-based WealthFront, founded in 2008). Word-of-mouth referrals from clients who say, “My service is wealth-something or something-wealth,” won’t drum up much business.

Regardless of its name, if you want to use a roboadvisor, you’ll have to fill out an online form and sometimes sit through a telephone interview so the service can accurately assess your tolerance for risk. The robo-advisory then recommends the optimal mix of investments, usually exchange-traded funds (ETFs). Robo-advisors automatically rebalance their clients’ asset mix in response to market conditions. When ETFs that track stock markets climb beyond their original weighting in a client’s portfolio, for example, the service reallocates the excess into ETFs that track bond indexes and cash, and does the reverse when stock markets are in a slump.

Based On ETFs Shifting

Most robo-advisors allow clients to pick from model portfolios, usually collections of ETFs that match their risk tolerance. Clients can also build their own portfolios from a list of available ETFs. The robo-advisor will tell you how much you should have in which type of investment, which is a step up from a discount broker that offers no advice. Most robo-advisors have employees who can offer personal advice but the onus is on the client to call.

Fees paid to robo-advisory services are a fraction of those paid by investors who hold units in mutual funds.

Small Account Size

Clients of robo-advisors are generally younger, who are completely at ease with receiving advice online vs. in person or over the phone. The fact that the minimum investment is usually much smaller than that required for a full-service brokerage is another factor that makes robo-advisors appealing to younger investors.

Here’s a look at some Canadian robo-advisory services:

Nest Wealth (

Nest Wealth, which so far is only registered in Ontario, asks new clients a series of objective and subjective questions to determine their net worth, income and risk tolerance. The consistency of clients’ answers also gets checked.

Clients must have a minimum account of at least $25,000. If you are over 40, you will need at least $50,000 in your account and Nest Wealth will charge a flat $80 monthly advisory fee. Those under 40 must have at least $25,000 in their account and pay $40 a month. In both cases, clients will have to foot the bill for the costs  of trading and holding their ETFs (the average management expense ratio for the ETFs that Nest Wealth holds is 0.18%). Clients must also pay National Bank $9.99 per trade when Nest Wealth rebalances their portfolios.

Nest Wealth’s website says it looks for ETFs with the lowest annual expense ratios, minimal tracking error and sufficient liquidity, which leads to BlackRock Canada’s iShares and Vanguard funds. Under a deal with BlackRock Canada, Nest Wealth has agreed to keep at least half of client portfolios in BlackRock’s iShares ETFs. This hardly imposes a restriction, however, since iShares already has about 70% of the Canadian ETF market.

Nest Wealth’s investment methodology is based on Modern Portfolio Theory, or an optimal mix of assets given your indicated level of risk tolerance. The staff at Nest Wealth watches clients’ portfolios and rebalances when an asset class gets too large or small, but at least once a year.

“We are not able to predict when we are likely to rebalance because that depends on the performance of each of the asset classes,” Nest Wealth’s site explains.

Portfolio IQ (

Portfolio IQ is one of many services offered by Questrade Wealth Management, best known as a discount brokerage that caters to frequent traders. The service is advertised in commercials featuring Cabral “Cabbie” Richards, host of TSN’s Cabbie Presents (they’re on YouTube).

“We're Canada's only online wealth management service,” its website says -- a claim its competitors might argue with.

Portfolio IQ clients can open an account with as little as $1 and there are no fees until the account reaches $2,000. Clients with between $2,000 and $99,999 in assets are billed 0.7% ($99.95 minimum per year). The fee drops to 0.6% for those with between $100,000 and $249,000 in assets, 0.5% for those with $250,000 to $499,000, 0.4% for those with between $500,000 and $1-million in assets and 0.35% for those with more than $1-million in assets.

Once a prospective client sends in the necessary information, a company representative, called a “portfolio architect” assesses the client’s personal and financial circumstances, financial goals, tolerance for risk and so on, then matches the client with one of five ETF portfolios. The portfolios include high risk, 100% stocks; growth, 80% stocks/20% fixed income; balanced 60% stocks/40% fixed income; income 40% fixed income/60% stocks; and conservative income, a mix of 20% stocks and 80% fixed income.

ShareOwner Investments (

ShareOwner’s Model Portfolio Service is a new twist on an established service best known for helping investors take maximum advantage of dividend reinvestment plans (DRIPs) by allowing members to use dividends to buy fractions of shares.

The original Canadian ShareOwner magazine was founded in 1987 by the late John Bart, an old acquaintance of mine who passed away in September. Anyone who knew John would not hesitate to invest in anything associated with his name.

ShareOwner’s main focus has always been on automatic dividend reinvestment, and for its robo-advisory service, this means reinvestment of dividends paid out by ETFs, in this case mostly from BMO, iShares and Vanguard Canada.

ShareOwner’s clients pick from one of five model portfolios: aggressive growth, made up entirely of ETFs that track stock markets; growth, 75% stock markets and 25% fixed income; balanced, a 50-50 mix; conservative, 75% fixed income and 25% stocks; and income, 60% stocks and 40% fixed income. Clients can also create their own portfolios from a menu of about 70 ETFs that include funds tracking Canadian and U.S. stock and bond indexes, preferred shares, money markets, gold, emerging markets, real estate and so on. Although the latter option sounds like picking from a discount broker, at ShareOwner, clients determine how much of which type they want. The allocations are reviewed and tweaked to make sure the relative proportions of the different types of ETFs stay within a few percentage points of their original mix.

Clients pay 0.5% of their assets, up to a maximum of $40 per month for accounts over $100,000. There is no minimum account size nor administration fees, making it well suited for novice investors.

WealthBar (

WealthBar’s website describes the company as “Canada’s only full-service online financial advisor,” a reference to the fact the company is a fully-licensed portfolio manager and that co-founder and CEO is financial planner Tea Nicola. The online feature means clients can send in questions and get answers from real advisors.

The company’s fees start at 0.6%, and drop to just 0.35% for those with more than $500,000 in assets. WealthBar has no minimum investment, but it puts clients with less than $5,000 into a money-market account until the assets climb past $5,000, when the account is reallocated into an ETF portfolio selected by the client.

Wealthsimple (

Wealthsimple clients, who must have at least $5,000 in assets in their account, pay an annual management fee of 0.35% to 0.50% of assets that covers trading, rebalancing and advice. Clients answer a 10-question online risk assessment when they sign up for an account, then speak to a “wealth concierge” who determines what portfolio is best for them. Asset allocations range from 70% fixed income and 30% stocks at the most conservative end, to 90% equities and 10% fixed income for those most comfortable with risk. Once the target allocation is set, a market movement that causes an asset to fluctuate 5% from its original weighting prompts a rebalancing.

Wealthsimple’s annual standard fees are 0.5% for accounts up to $250,000, 0.4% for those with accounts from $250,000 to $1-million, and 0.35% for investments of more than $1-million.

Wealthsimple says it has negotiated price deals on ETF management fees (which average 0.25% per year) and foreign currency transactions, which it passes on to clients.

The company describes interest rates and market volatility as the two primary risks it takes into consideration when rebalancing clients’ portfolios. Wealthsimple uses real estate and dividend stocks to generate income without the interest-rate exposure that bonds have, and allocates some capital to hedging strategies designed to resist market plunges.

The robo-advisory or “light advice” market is bound to catch on with younger investors who don’t have much to invest and who are comfortable with online advice—especially if the advice comes at a bargain price.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.