Pros and Cons of Robo Advisors
The Fintech (aka financial technology) world has exploded in recent years with the introduction of Robo Advisors, with everyone clamouring to create their own Robo Advisor firm. For more information on Robo-Advisors, check out Money Sense’s guide “Which Robo-Advisor is Right for you”.
WHat is a robo-advisor
A robo-advisor is a company that combines the financial aspect and the technology aspect so that you can invest your money without setting foot in a bank and just through the computer. You deposit your money and it gets automatically invested (depending on your risk profile) into certain exchange traded fund portfolios. You will get charged a fee (most are under 0.50%) to have your money managed. By money managed, it is just a passive investing but it will rebalance your money if your asset allocation is off. The Exchange Traded Fund fee will be in addition to the robo-advisor fee, so it will cost approximately 0.75-1.00% to manage your money with a robo-advisor.
Robo-Advisors are meant for people who are not confident enough (or who don’t have the time for) Do It Yourself Investing.
There are a plethora of Robo Advisor Companies in Canada, here are some of them:
NB: note that they might not be offered in your province or territory
PROS Of robo advisors
- If you’re scared to invest but don’t trust the financial advisors at the bank who sell you mutual funds with MERs of 2.5% +, robo advisors may be right for you.
- There are some promotions available since they are so new, some offer to manage a certain amount of money for free for a certain time
- You don’t need a ton of money to start a robo-advisor account
- It takes the emotion and discipline out of managing your portfolio and does it for you (and as we know, emotions are the bane of the do it yourself investors (and also hedge fund managers) existence)
cons of robo advisors
- For people that ‘don’t have money to invest’ (whether it be because they are eating too much avocado toast (haha!) or saving for a down payment on a home) a robo-advisor won’t fix that
- If you prefer to meet someone in person then Robo Advisors aren’t for you
- There’s still a lot of affiliate stuff going on (not unlike financial advisors who get a commission for selling a certain financial product) so when you see recommendations on the Internet you may be wary of whether the review is biased or not
ACORNS and MYLO: THE SUPER ROBOS!
I recently heard about Acorns, an app based out of Australia that has been popular in the United States that automatically rounds up your credit card purchases and with that change, will automatically “micro invest” your money for you. Acorns has piqued the interest of Ashton Kutcher who has invested in it. Acorns makes money by charging you $1 a month (if your account is <$5000, if it is over $5000 then it is 0.25%). And you can choose how aggressive (or not aggressive) you want your ETF investing to be. It sounds like you can round up to the $0.01 or to $5.
Mylo is similar to Acorns and also charges $1 a month and is based out of Canada. Prior to May 2017 their beta testers were able to have Mylo for free per month. Similar to Acorns, Mylo also rounds up your purchases, they give an example of buying a $3.25 Starbucks drink and they will round up to $4.00, investing your $0.75.
To me these options are for those who are absolutely afraid of investing and feel that they don’t have the money at the end of the month to invest.
This takes the reasoning and the guilt out of setting aside money which, in my opinion, if you start very young, you will be able to see your money grow. Likely you’ll need to invest more if you want to see big changes but this is a good baby step in my opinion. And perhaps this will increase your confidence with the stock market so that you can invest your money yourself without having to automate it with an app.
Readers what do you think of Robo Advisors? Do you use them?