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Nov 1, 2016

Robo-Advisors Pros And Cons

by Ken Kivenko

Ken KivenkoRobo-advisors or fully automated online investment platforms, are springing up quickly, appealing mainly, but not exclusively, to less affluent or younger investors. Robos capitalize on the power of the internet and the use of very low cost products such as exchange-traded funds (ETF's) and algorithms for constructing optimal portfolios.The growing popularity of algorithm-based investment advice is changing the financial services landscape. Today, robo-advice is seen simultaneously as a Fintech segment bound to benefit from an increasing regulatory emphasis on fiduciary standards, a challenger to the conventional advisory business and a vehicle to serve less affluent investors.

Current players in the Canadian robo-advisor space include Canadian ShareOwner, Idema Investments, Invisor, ModernAdvisor, Nest Wealth, Questrade's Portfolio IQ, Smart Money Capital Management, WealthBar and Wealthsimple with more expected over the next 12 months.

The closest competition comes from mutual fund wraps, low cost balanced funds and target date funds which are much more expensive. There is also Tangerine's family of index funds. Another approach is DIY investors who use discount brokers, but that requires more personal attention and time.

According to independent research firm Morningstar and others, Canadian mutual fund fees rank among the highest in the world yet they are the investment of choice for millions of Canadians. With an average MER of approximately 2.2 % the long term de-compounding of returns is astonishing. If you invest $5000 initially and $1500 per annum for 25 years at 6% average return you get an ending balance of $102,256 after paying fees of $23,402! Robos can dramatically improve on that and there is reason to believe that many investors dissatisfied with the prevailing system of conflicted advice, unsuitable investments (sometimes even fraud) and high fees will embrace this new service.

The online advice model available to Canadian investors provides discretionary portfolio management. This means the online advisor makes investment decisions on your behalf without your specific approval for each trade. It’s not robotic: it’s a hybrid model where a human advisor uses online tools for efficiency but is required to meet all regulatory standards.

Through an interactive website, a series of questions are used to gather crucial information about you as a part of the Know Your Client (KYC) process. This information is meant to confirm your identity as well as to give the firm a good understanding of your investment profile and needs. This includes determining things like your goals, risk tolerance, time horizon and level of desired liquidity. The online investment advisor is responsible for establishing whether there is enough information about you to allow for suitable recommendations to be made. The online investment advisor typically will also get in contact with you prior to completing this information-gathering process. This is especially the case when the registered financial advisor notices inconsistencies in the way you have answered questions (e.g. want high return, low risk). Also, you can always initiate contact with your advisor. The options for how an investor and the advisor communicate are typically by telephone, email, online messaging or SKYPE/video chats.

The online investment advisors operating in Canada today are generally not using complex products for their clients’ investments. Typically, they use model portfolios consisting of a number of liquid ETFs, low cost mutual funds, other redeemable investment funds, or pooled funds or cash and cash equivalents. Most keep the number of ETFs and funds down to seven or so. The basic investment categories are investment-grade government and corporate bonds and Canadian, U.S. and international equities. Some firms include other categories such as high-yield and real-return bonds, emerging market equities and REIT's (Real Estate Investment Trust). Some firms may offer a SRI (Socially Responsible Investing) option.

Robos are regulated by provincial securities commissions. The Ontario Securities Commission regulates Robos in Ontario, for example. The robo-advisors are registered as Portfolio Managers which means they have a fiduciary duty. Every advising representative is also registered. In the event of a dispute, access to the Ombudsman for Banking Services and Investments (OBSI ) is available.

Your assets are held in a brokerage account in your name at a chartered bank. For instance, at Nest Wealth, funds are held at NBCN Inc., a subsidiary of National Bank of Canada. NBCN Inc. is backed by the strength of National Bank, a member of the Investment Industry Regulatory Organization of Canada (IIROC), the national self-regulatory organization which oversees all investment dealers. All IIROC dealers are members of the Canadian Investor Protection Fund (CIPF).In the unlikely event that the bank becomes insolvent, they can reimburse investors for any shortfall in investment accounts within defined limits, to a maximum of $1 million per account as defined by CIPF (

Investors can access their accounts any time online and, in many cases, also view the accounts via smartphone or tablet using an app configured for those devices. Performance information is readily available.

While robos can design and provide index-based investment portfolios that meet fiduciary standards, they currently cannot provide the type of holistic financial-planning advice in which investment choices are just one part. The answers to questions such as whether to pay off a mortgage or whether to open a RRSP or TFSA, for example, often have fiduciary implications— and current robo offerings are not designed to provide such advice.

Some U.S. analysts suggest that robo advisors don’t meet the fiduciary standard, largely because they don’t provide portfolio analysis that examines the risk and reward features of an investment in the context of the portfolio as a whole and as part of an overall investment strategy that considers other investments, assets, sources of income and other resources, among other factors.

Investor advocates are critical of the risk questionnaires used to direct robo-advice. They question their robustness. How does the information get updated? What about anomalies? Of course, there are many deficiencies in the KYC and risk profiling processes used by traditional advisors as well, as documented by independent research and regulator compliance reviews. So far, however, Canadian regulators have accepted the risk profiling process used by robos.

Our view is that if you want a sum of money professionally managed, for low cost, robos are fine as long as the constraints and limitations are clear. Sometimes, however, only a traditional investment advisor will do. Here are the the pros and cons of a robo-advisor.

When A Robo-Advisor Makes Sense

Robo-advisors can be a real advantage when at least some of the following apply:

  • You do not meet the minimum account balance for a traditional advisor.

One of the major limitations of traditional investment advisors (most mutual fund reps are just salespersons operating under the low suitability standard) is the account minimum balance requirement. Most require you to have at least $100,000 in your portfolio before they will even consider working with you. The so-called “advice gap” is predicted by dealers if tougher regulations are imposed. Regulators are clamping down on traditional commission-based “advisors” and considering prohibiting the use of embedded commissions in mutual funds. Robos may therefore play a significant part in closing the predicted gap. Robo-advisors will provide professional investment management of a portfolio with as little as $5,000. Some will even allow you to open an account with a more modest initial investment. This is a big part of the reason why robo-advisors are more popular among new or young investors.

  • You don't need much in the way of direct contact.

Some people like personal contact in connection with their investments, while others have no need for it. If you’re perfectly content turning the job of managing your investments over to someone else, someone with whom you have little if any contact, robo-advisors are a good choice. Just make sure you’re okay with not having a human advisor to talk to in the event the stock market crashes. That’s often the time people most want to speak with an advisor directly. If you’re prepared to ride out the downturn and you don’t have a need to discuss it with a person who is intimately familiar with your investments, then the robo-advisor route should work for you. Remember, though, one of the benefits of a human advisor is the ability to encourage savings and temper your behaviour during market extremes.

  • You only want investment management.

You may have your own accountant to assist you with tax matters. Your assets are so modest that a detailed financial plan is not justified. You use a lawyer for estate planing or preparation of your will. In these cases, a robo may make sense.

  • You fully understand the impact investment fees have on long term results.

How much you pay in investment fees can have a material effect on your investment performance, especially over the long term. Traditional mutual fund investments cost anywhere from 1.5% to 3%, while robos charge less than 1%. In fact, you can get robo-advisors with investment fees as low as 0.50 % per year to manage your investments. All things being equal, this can dramatically improve portfolio performance.

  • You’re willing to let someone else do your investing.

When you invest in a robo-advisor platform, your online advisor will handle all of your investment activities for you. All you need to do is finance your account.

When You Should Use a Traditional Investment Advisor

Despite the rising popularity of robo-advisors, many people still prefer having a traditional investment advisor.

  • You’re not comfortable transacting business online.

Some people, typically younger generations, are perfectly okay conducting all of their business on the web. But some people are uncomfortable about internet security and privacy.

  • Direct human contact is very important to you.

If you prefer having direct human interaction regarding your investments, you’re best to stay with traditional investment advisors. They will not only manage your portfolio for you, but they’ll also be available to discuss your questions and concerns. Robo-advisors typically allow you some form of phone access, but there’s no one at the platform who actually has primary responsibility for, and knowledge of, managing your portfolio.

  • You want at least some measure of control over your investments.

One of the limitations of robo-advisors is that they’re pretty much hands-off activities. The robo platform will design a portfolio based on your KYC information. You will not have an opportunity to customize your portfolio in any way. Robos tend to use passive investing and you may be a believer in active management.

  • You don’t agree with the investment allocation robo-advisors use.

Beyond the lack of control over your investments, a robo-advisor arrangement may not work for you if you’re not comfortable with the actual allocation that’s assigned to your portfolio. Because they are fully automated, robo-advisors simply don’t have the kind of investment flexibility you can get with a traditional investment advisor.

  • Most of your money is in an employer-sponsored retirement plan.

Because employer-sponsored retirement plans are directly managed by an investment trustee, you may not be able to put the assets under the control of the robo-advisor. Under this arrangement there is typically a company contribution match which is important to utilize. Check to see what options are available A number of firms now offer Group RRSP plans.

Fund salespersons often used the ratings to justify redeeming existing funds and sell new winners, often starting the DSC period all over again or causing a capital gains exposure.

Before you decide on a robo, you should ask some questions: Are there any conflicts of interest? Where and how will the investments managed by your online advisor be held? What types of accounts are available (e.g. trading, RRSPs, TFSAs, RESPs, LIRAs, RDSPs and LIFs)? How does the robo-advisor construct and manage its investment portfolios? What are the methodologies? Which securities are employed? Are there different portfolios for registered and taxable accounts? How is risk managed? How often is the portfolio rebalanced? Can the robo approach be used for de-accumulating accounts like RRIF's? What are the fees and other expenses? Will the firm provide reimbursement for transfer fees if you transfer in assets from another dealer?


Robo-advisors can work very well in a lot of situations. But since everyone’s situation and temperaments are different, you still need to weigh the options of whether a traditional investment advisor will work better for you and your investing style. If you need more advice than a robo is able to provide you can become a DIY investor or hire a fee-only planner, accountant or a lawyer depending on your other specialized financial advice needs.

Take a look at the various websites and platforms, The Globe and Mail Guide to Online Advisors is well worth reviewing

After slimming down the list, explore several firms and determine which one will work best for your requirements. Note that fee structures vary considerably so be sure you understand all charges you will incur. A handy Canadian Investment Fee Calculator for Robos can be found at:

A mutual fund fee impact calculator is available at:

Make sure that you are dealing with a registered firm before you disclose your personal and financial information and open an account. Check the firm's registration at

Ken Kivenko, PEng, President , Kenmar Associates, Etobicoke, ON (416) 244-5803,,