Should one go with robo-advisors? | General financial discussion | Discussion forum

What kind of robo-advisor.. Any companies etc?

Stock pickers by machines. Remember those? Merrill Lynch? Smith Barney? E. F. Hutton? All those are using machines for years.

I like this forum as a CIDC insured deposit discussion.

A word of warnings: https://www.sec.gov/oiea/investor-alerts-bulletins/autolistingtoolshtm.html

2017opinionsmatter said
True. But how do we know human advisors are not using the same method, screening system or even having the same pump and dump schedule? After all it is the same companies and same group people working within the system. They are not mutually exclusive in anyway. I am ok with FA making a living out of it as long as we as retail investors can tag along. But if it is the same system why not pay a lit less?  

Any investment comes with certain risks. If your concern is more on conflict of interests with human advisors, then I can assure you that even the machines are programmed by human with some basis of modelling and influenced by the company and market data feed. There is no such a thing 'Auto-Pilot to win'. The market (equity, bonds, future/options, forex) is a big casino.

I would rather pay someone calculated high fee for big return if there is such a thing. Fee will never be an issue when your investment is profitable

Does anyone know what kind of insurance underpins the operation of the robo companies? In other words, what happens to your money if the robo company goes belly up?
Also, do they operate under some kind of fiduciary responsibility?
I'm just not sure what controls their decisions ultimately.
I don't know much about them.

Loonie, no such thing as robo companies (there are always humans still running and working at the companies), robo advisors is just a term that refers to the fact that investment brokerages and banks are increasingly using automated programs instead of humans for part or all (e.g. WealthSimple) of the investment decisions and activities re client accounts. Just a new way of doing the same stuff, so the existing laws and regulatory requirements still apply. For example, instead of having a human broker doing your buying and selling of securities, and rebalancing your account in accord with your risk profile, you now have the option to hand that job over to a program, if you prefer. That's just one example, robo advisors can do pretty much anything humans have always done. Increasingly people prefer to do things via tech vs via humans so serving that client desire is part of what's driving the growth in robo advisors. That's my understanding.

Loonie said
Does anyone know what kind of insurance underpins the operation of the robo companies? In other words, what happens to your money if the robo company goes belly up?
Also, do they operate under some kind of fiduciary responsibility?
I'm just not sure what controls their decisions ultimately.
I don't know much about them.  

No problem, Loonie. Yes, they do operate under a fiduciary responsibility, versus investment dealers (i.e., RBC Dominion Securities) or a mutual fund dealer (i.e., HSBC Investment Funds (Canada) Inc) as they are registered portfolio managers managing your funds under a "fully discretionary" basis and, accordingly, are adhered to a "best interest" rather than a "suitable" standard of employees registered as "dealing representatives" (investment/mutual fund).

As far as CIPF goes, the funds are not actually held by the robo-advisor firms themselves, though portfolio management firms are directly regulated by provincial securities commissions in which they operate (versus through self-regulatory organizations like IIROC and MFDA) and, as such, have to adhere to certain capital adequacy standards. The actual funds are held in your name through a managed account at a carrying broker (many use National Bank Correspondent Network [NBCN], BBS Securities which also owns Virtual Brokers, Questrade, Qtrade or Credential Securities). If you hold registered accounts with them, those are further segregated from the assets of the carrying broker and held by a federally-regulated trust company, such as Computershare, State Street, BNS Trust Company, etc. Essentially, "discretionary basis" is like giving the robo-advisor a special limited power of attorney to manage the funds on your behalf, though they cannot withdraw funds without your approval. Hence the higher fiduciary standard.

Hope that helps,
Doug

Loonie said
Yes, that's helpful. Thanks, everyone.
A bit of a tangled web with the insurance, but I gather you mean to say that it's OK.

I did look into PWL Capital at one point, which is not quite a robo-advisor as you do deal with humans. I felt positively about their attitude but have not taken the leap and probably won't. They have a minimum investment of 500K,which might be more than some people have or want to put into it, but it's the point at which it works out for PWL. Fee percentage decreases at higher levels, as it should.
1% of 500K + MER still seems like a lot to me, compared to, say, Couch Potato, which might have similar results before fee. I have not done the math, in terms of transaction fees etc., but surely CP would be less, even if you rebalance quarterly? I just can't convince myself to pay 5,000 annually for rebalancing, which should be easily programmable - even by me! I can't see that there is much more to it, especially as Bortolotti now works for PWL.

I read somewhere that PWL tried to offer a coached DIY set-up, where they would walk people through the formula and hold their hands with trades, but it took up too much time and they couldn't afford to continue to offer it. People didn't seem too educable. This may be a warning to us!  

No problem. It sounds complicated at first until you really understand regulatory framework under which each operates.

Basically, let me try and help simplify it a bit - the robo-advisor, which is basically an online version of a registered portfolio management firm, has an online, digital client onboarding "front end," basically, that sees them be the ones that have you fill out the online forms and digitally sign them, which are then transmitted electronically to their carrying broker, the actual broker that holds the securities with the Canadian Depository for Securities Ltd in your name (CDS technically holds shares in its name for all shares traded on exchanges). You assign your portfolio manager, or robo-advisor, as your account manager basically on a fully discretionary basis so that they may place trades and so forth. If you wish to make a contribution or a withdrawal, they still need your electronic or written instruction. They have an electronic platform that allows you to view online access to your portfolio and provide those electronic instructions, which then interfaces with the carrying broker's system, which is often different than the front end you might see on a self-directed discount brokerage screen.

Portfolio management firms have working capital requirements provincially and are directly regulated by provincial securities commissions whereas investment dealers (including carrying brokers and introducing brokers), while licensed by provincial securities commissions, essentially their regulation is primarily the SROs of IIROC and MFDA. That's why you can't look up a discretionary portfolio manager on the MFDA and IIROC websites. Only the 'securities-administrators.ca' website will show their licensing status. 🙂

As far as costs go, it depends how many ETFs you would be holding, how often you want to rebalance and how often you want to reinvest your dividends. If the answer is only annually and you hold only 5-6 ETFs total, per account, then it's probably a bit too expensive (i.e., $9.95x5 for the sell and $9.95 for the buy so $100 per year, or 0.10% "self-advisory fee". However, since trading costs are included, you get the benefit of monthly or quarterly reinvestment of dividends with a robo-advisor. Also, the hassles of asset allocation rebalancing, tax loss harvesting and the like. For newer investors and for those that don't have the time, I think it's a great thing, especially when you consider a robo-advisor or PWL Capital can do all of this and more for the same cost as Tangerine's index funds.

Also, it's 1% inclusive of underlying ETF MER, I should point out, not plus ETF MER so that's pretty compelling to me. Depending on your ETFs, the total "all in" MER+advisory fee could be less than 1%. With Justwealth, it's about 0.65% "all in" (i.e., 0.40% advisory + 0.25% weighted average portfolio MER).

Also, "robo-advisor" is a bit of a misnomer as you can deal with a human with Justwealth or others anytime you want. Sometimes they'll refer you to an associate portfolio manager or some other wealth-qualified customer relations person but you can schedule appointments with either their CIO (James Gauthier), who is your account's portfolio manager, or its CEO (Andrew Kirkland), who handles the business side of things and serves as associate portfolio manager.

Cheers,
Doug

AltaRed said
To add one more point. It is inappropriate just to focus on costs, notwithstanding for well under <1%, the client gets a range of supporting services. For the example I examined, WealthSimple provides a lot for the uninterested and/or inexperienced investor for as little as 35bp (accounts over $1 million). There is no unnecessary churn and cap gains are consciously managed in non-reg accounts with the input of the client. That is a lot of comfort for the busy career individual or a retiree enjoying the candy store of life.

Re-balancing mechanisms can make the client a lot of money just by being in the right AA at the right time, and maybe more importantly, taking common investing mistakes out of the hands of clients, e.g. buy high, sell low, and letting the tax tail wag the dog. A lot of money can be made through appropriate Asset Allocation and disciplined re-rebalancing.  

Well said, AltaRed. All great points. I just tended to focus my rationale for robo-advisors on costs, automatic rebalancing, regular dividend reinvestment and fiduciary responsibility normally afforded to so-called High Net Worth investors only. 🙂

It was also enlightening to hear that Loonie is not all invested in HISAs and GICs like SD2013 espoused a number of years ago with his/her relentless strip bond & GIC ladder posts. 😉

Cheers,
Doug

Doug said

It was also enlightening to hear that Loonie is not all invested in HISAs and GICs...

Cheers,
Doug  

Now, now, Doug. You may be too optimistic. I never said I'd actually invested with any of these alternatives, only that I'd looked into them!! LOL

I didn't know, though, that MERs were included in the fee charged. I didn't think it was possible to extract the MER from its fund and then deduct it from the advisory fee in arriving at the actual fee. That would make a difference. I don't understand it though. I thought the MER was paid to the fund company, not the advisor company, so I don't understand why one would affect the other.

Loonie said
Now, now, Doug. You may be too optimistic. I never said I'd actually invested with any of these alternatives, only that I'd looked into them!! LOL

I didn't know, though, that MERs were included in the fee charged. I didn't think it was possible to extract the MER from its fund and then deduct it from the advisory fee in arriving at the actual fee. That would make a difference. I don't understand it though. I thought the MER was paid to the fund company, not the advisor company, so I don't understand why one would affect the other.  

LOL, I assumed that meant you maybe had a self-directed discount brokerage account instead of being with a robo-advisor?

The MER technically is not included in the advisory fee charged but for the purposes of calculating an effective annual "all in" fee, I included it. In Justwealth's case, their advisory fee, which is tax-deductible in non-registered accounts (and apparently, they can deduct your registered account fees from your non-registered account, which would make it near-impossible, for CRA to track that that fee was for your registered account and not tax-deductible, I wonder? ;)), is 0.40% of assets for household assets over $500,000 and then they calculate their effective average portfolio MERs and the largest ones are not more than about 0.24-0.28% so, effectively, your "all in" cost is 0.65-0.70%. With PWL Capital, their advisory fee is around the 0.70-0.80% range so with the MER of underlying ETFs, which are similar to robo-advisors, you're looking at or just under 1% - cheaper than Tangerine's investment funds with greater rebalancing, reinvestment of dividends, harvesting of tax losses, financial planning discussions, etc. all included. 🙂

Hope that clarifies,
Doug