What are Canada's Best Robo-advisors?
comparatorTitles.logo
| comparatorTitles.price
| comparatorTitles.featureList
| comparatorTitles.yesList
| comparatorTitles.link
|
|---|---|---|---|---|
item.logoSubtitle
|
item.pricePrefix
item.price
item.priceTitle
item.priceSubtitle
|
| item.badge
|
item.phoneText
item.clickOutButtonText
[[item.selectionText]]
item.clickOutSubtitle
|
comparatorTitles.name
Ever wondered how other Canadians invest in the stock and bond markets? Well, according to the Investment Funds Institute of Canada (IFIC), approximately $1.7 trillion was invested in mutual funds in Canada at the end of 2019. And another interesting fact is that 92% of mutual funds don’t beat the market, often underperforming by a significant amount each year.
So, is there a better way?
Using a robo-advisor could be the answer and since they became available in Canada in 2014, $8 billion has already been invested by Canadians in these “new kids on the block”. We’ll take a look at robo-advisors in Canada and why so many Canadians are turning to them instead of traditional brokers or advisors.
What is a robo-advisor?
The traditional way for most people to invest in the stock and bond markets is via a broker or financial advisor. After determining your tolerance to risk and investment objectives these professionals then invest your money in a selection of either mutual funds or stocks and bonds, picked and managed by them. The theory is that their experience and in-depth knowledge will enable them to beat the market over the long term. But as we’ve already seen, the majority underperform the main market indices. The robo-advisor takes away a large part of the human decision-making (which is what costs you money, and often adds to underperformance), and automatically invests your money in low-cost funds designed to track a wide range of market indices.
Get tips from our investment experts
What are the best robo-advisors?
The choice of robo-advisors in Canada is very competitive and they’re all good at what they do.
A pick of the best are:
- Wealthsimple Robo-advisor – longest established, great choice of features, competitive costs.
- Questrade – lowest costs, plenty of features.
- Scotiabank – great flexibility, can be partnered with a bank account to pay bills.
However, below is a table of robo-advisors in Canada available to you:
| Robo-advisors | Fees (%) | Minimum account size ($) | Balanced portfolio return (1-year) | 3 years (%) | 5 years (%) |
|---|---|---|---|---|---|
| BMO Smartfolio | 0.4%-0.7% | $1,000 | 9.09% | 7.11% | 6.18% |
| CI Direct Investing | 0.35-0.6 | None | 11.14% | 9.47% | 8.62% |
| iA WealthAssist | 0.7% (incl. MER) | None | N/A | N/A | N/A |
| Justwealth | 0.4-0.50%; $4.99/month for accounts <$12,000 | $5,000 | 14.89% | 11.17% | 8.75% |
| Nest Wealth | $5-$150/month | None | 14.16% | 8.54% | 7.43% |
| Questwealth | 0.2%-0.25% | $1,000 | 11.19% | 8.47% | 6.76% |
| RBC InvestEase | 0.5% | None | 8.57% | 9.47% | N/A |
| Smart Money Invest | 0.8% | $5,000 | 9.49% | 7.72% | 7.73% |
| VirtualWealth | 0.35%-0.6% | None | 8.1% | 9.4% | 7.2% |
| Wealthsimple | 0.4%-0.5% | None | 6.6% | 6.9% | 5.9% |
How do robo-advisors work?
There are two main reasons traditional advisors and brokers underperform:
Human fallibility
- No matter how experienced an investment professional is, they base their decisions and advice on their own judgment and emotions. They only need to get it wrong some of the time and they will be left behind by the index they’re trying to beat.
Costs
- Investment professionals come at a cost in fees, commissions, and expenses. And these costs come out of your portfolio, reducing your returns.
- Mutual funds, in which most advisors invest your money, carry another layer of costs, often up to 2% per year. That’s taking 2% off your annual return.
Robo-advisors dispense with a large part of both these factors. Once you agree on your objectives and tolerance to risk, they allocate your money to an appropriate mix of Exchange Traded Funds (“ETFs”) and then regularly rebalance the portfolio automatically.
That’s the important bit, so let’s take a closer look at what it means:
ETFs
Unlike mutual funds, ETFs are funds which invest automatically in a whole range of market indices, with the sole aim of matching the performance of the index. So, for example, an ETF designed to match the S&P 500 might invest in every company in the index in its correct proportion to the index. Most of the investing in an ETF is automatic and doesn’t need any input from investment professionals. For this reason, the cost is significantly less than it would be in a mutual fund.
A term you’ll see a lot when you start looking at investing in funds is “MER” (Management Expense Ratio). This is effectively the combined costs incurred by the fund manager to run the fund. An MER of 2% means that, if you have $10,000 invested, you’ll pay $200 a year. This isn’t an explicit fee; it comes out of the return the fund makes.
The important thing is that this fee is payable whether the investment performs well or not.
Typical MERs for mutual funds are between 1.5% to 2% per annum. This is where ETFs save you money – their typical MERs are less than 0.3% per annum. And that makes a big difference to overall returns when it’s compounded over a number of years.
Good to know
If you invested $100,000, the cost of a 1.7% difference in MER would be around $19,000 over 10 years!
Automatic re-balancing
A major feature of robo-advisors is that they automatically rebalance your asset mix. So, if for example, your mix is 60% equities and 40% bonds and the equity part increases by 10%, your portfolio would now be approximately 62% equities and 38% bonds.
The algorithm the robo-advisor uses would sell some equity ETFs and buy some bond ETFs to re-balance the portfolio and get it back to your agreed risk profile.
And the re-balancing isn’t limited to movements in equities vs bonds. If one sector of the equity market outperforms the others it will take effect then as well.
This is where even investment professionals often get it wrong – their human instinct is to keep hold of rising assets until it’s too late and they start falling. It’s where robo-advisers vs human advisers differ and can make a difference either way to the overall performance. But it takes the guesswork out of timing the market.
This doesn’t mean that the whole thing is run by robots though. Many robo-advisors provide a point of contact to help you agree on your risk tolerance, and objectives and to discuss your situation. It’s the day-to-day investment process that’s automated.
How can I invest with a robo-advisor?
Very easily is the short answer!
Firstly, decide how much you wish to invest. The minimum deposit amounts with most Robo-advisors are low, typically $1,000 to $5,000, but some have no minimum. Secondly, decide whether you need any human advice and check out or comparison table for the robo-advisor that most meets your needs.
The choice of robo-advisor might also depend on how the capital you wish to invest is to be held, such as in an RRSP, TFSA, RRIF, RESP, or LIRA. Other factors to consider are whether you want the flexibility to pay bills directly from your robo-advisor account and whether you need to take advantage of tax loss harvesting (to optimize tax allowances on redemptions), or if responsible investing is important to you.
All robo-advisors allow you to open an account online and the process is very straightforward. You answer a few questions about your risk tolerance, objectives and personal situation, and if appropriate speak with an account manager. They then select a portfolio mix for you from a selected range of ETFs.
Get tips from our investment experts
What are the benefits of using a robo-advisor?
Robo-advisors are worth it for simplicity, costs and the potential that, with lower MERs the returns will be greater. Investing with a broker or financial advisor usually involves a lot of discussion and meetings to justify or explain their decisions. With a robo-advisor, the investment is automatic so none of that is necessary.
You could invest directly into ETFs and avoid paying a management fee to a robo-advisor, but you would not benefit from an automatic rebalancing of asset sectors and would be taking a gamble on choosing the right markets to pin your investments to.
Good to know
For most people the modest management fees that most robo-advisors charge will be justified by the added value of easy reporting and financial market selection, which are all included in the management fee.
Robo-advisors vs financial advisors
The decision whether to use a Robo-advisor or financial advisor depends on a few factors, such as whether you have a complex situation that might benefit from tax and financial planning services that a financial advisor can provide (at a cost), or whether you need more hand-holding in your investment decisions.
Why pick a robo-advisor?
Pros
- Simplicity
- Low management costs
- Low MER
- Automatic investment process
- Reduced human error
Cons
- Little or no access to tax and estate planning advice
- Not suitable for short-term investment as based on market returns
Why pick a financial advisor?
Pros
- Human touch if you need guidance and reassurance
- Can provide estate and tax planning advice
Cons
- Higher management fees
- Higher MER
- Will require regular meetings/discussions
- Higher costs don’t guarantee better performance
Get tips from our investment experts
What should I consider when choosing a robo-advisor?
Because a robo-advisor is a “passive” service where the investment allocation is carried out automatically, rather than by stock-picking, the main consideration will be cost.
Management fees and MER will be what affect performance the most. But because the only way you will be able to access your portfolio is online, you need to ensure that your choice reflects what suits you best. Some robo-advisors have more user-friendly portals than others.
If you need to have access via cell phone or tablet then it’s important to check whether the robo-advisor has an app. You also need to check whether the robo-advisor can deal with your investments if they are part of, for example, an RRSP, TFSA, RRIF, RESP or LIRA.
Some robo-advisors also have special features that could be valuable to you. A good example of this might be tax loss harvesting. This is a feature that favors redeeming ETFs that have made a loss when you make withdrawals. It could be useful if your portfolio is not inside a tax-saving vehicle.
To help you decide which robo-advisor to choose, we offer a free comparison tool at the top of this page!
Are robo-advisors safe?
All of the robo-advisors we recommend are members of the Canadian Investor Protection Fund (CIPF) or the Investment Industry Regulatory Organization of Canada (IIROC). This means that, in the event of their failure, you are as well protected as you would be if your money was in a Canadian bank.
Your capital will be invested in ETFs linked to the performance of financial markets, so the value can go down as well as up, in the same way as any other portfolio can.
What are the fees when using a robo-advisor?
There are 2 main costs when you use a robo-advisor:
Annual management fee
This is the fee charged by the robo-advisor for the service they provide. Fees range from 0.2% to 0.8% per annum, although some robo-advisors charge a fixed monthly or annual fee for smaller investments.
These costs compare very favorably with brokers and financial advisors who will often charge between 1% and 2% a year in fees on top of MERs in the mutual funds they use of up to 2% per annum.
There may also be transaction fees and other commissions payable to financial advisors and brokers.
MER
This is the total cost of each of the ETFs in which your portfolio is invested. The cost is expressed as a percentage of the funds in each ETF and comes directly out of the return before you see it. Typical MERs in ETFs are below 1% per annum and average between 0.2% to 0.35%.
Can you make money with a robo-advisor?
The simple answer is yes of course! And a growing number of Canadians are realizing the benefits of using a robo-advisor. Because the ETFs in which robo-advisors invest their money are directly linked to stock and bond markets, the returns will closely follow those markets. And because the costs of investment are very low, you will see more of those returns than in a mutual fund that enjoys a similar performance. Long-term returns on mature stock market indices such as the S&P 500 are between 7% and 10% per annum, depending on how long a period you look at. And if you invest via a robo-advisor you should enjoy similar returns if you invest on a long-term basis.
