The Canadian Press - ONLINE EDITION

Robo-advisors could manage your money for less, but would you trust them?

  • Print

TORONTO - The future is here, and it includes robots managing your money.

Or, to be precise, robo-advisors: Programs that use an algorithm to help you determine what investments are best for you.

The thought of putting a computer in charge of your financial decisions may make some uneasy, but if you do your banking online, as well as buy groceries and set up dates, why not also receive financial advice over the Internet?

That appears to be the thinking behind a field garnering a lot of interest in the U.S., and one which the president of the Investor Education Fund in Toronto says reflects the fact that younger generations are changing the way they interact with every market place.

"It's natural to think that this may be a solution that works for them, because they're not coming to the market place with pre-conceived notions," said Tom Hamza.

"There may (also) be some skepticism lingering from major financial events that have happened in the last decade or so."

The robo-advisors take you through a series of questions to determine your goals and your risk tolerance and then build a diversified portfolio using passive investments like index funds and ETFs.

The automated financial advice is generated by software programs developed by specialized wealth management firms that take your information and run it through their calculators. Some rely solely on algorithms, others involve an online advisor or are a combination of both.

"These organizations can provide advice to clients at a very low price point, and they can serve a portion of the population that's been really under served, people who haven't had access to investment advice," said Robert Stammers, director of investor education at the CFA Institute.

Robo-advisors are also generating buzz in Canada, although the concept has yet to be fully established here. Some Canadian brokerages are offering more online advisor services, but the U.S. has several small, quickly growing robo-advisor companies serving investors.

Wealthfront Inc., one of the biggest with more than $800 million in client assets, doesn't charge an advisory fee on the first $10,000 of assets under management. On amounts over $10,000, the monthly advisory fee is based on an annual fee rate of 0.25 per cent. Clients also incur the fee embedded in the cost of the ETFs owned, which averages about 0.17 per cent. Betterment, its biggest competitor, offers a management fee as low as 0.15 per cent, so both are below the roughly two per cent most traditional financial advisors charge.

But while financial experts think Canadian markets would benefit from a bigger robo-advisor presence, they also warn this new alternative doesn't come without risks.

There are questions around whether the software is sophisticated enough to asses a client's tolerance for risk and to adapt with changing markets, or to deal with investments that may become more sophisticated.

It's also unclear whether the tools these programs used to gather information are the most effective. A 10-question questionnaire about your risk tolerance and goals may not give the complete picture - and investors aren't always the best at assessing their own capacity for risk.

"It's easier for an algorithm to determine someone's financial ability to take risk, but it's a whole lot more difficult to determine a client's emotional ability to take risks, and that's probably where a financial advisor has an advantage over a computer," said Stammers.

It may also be difficult for people to compare across these platforms because, as they are based on computer code, their inner workings aren't always clear.

Adam Molnar, a surveillance expert with Queen's University, said investors should also think about the security of their private information when looking to use this kind of software.

The exposure of the Heartbleed security bug that prompted the Canada Revenue Agency to shut down its website last month, he said, shows that "there is no such thing as perfect security."

While most companies will promise to take security seriously, customers can't independently gauge whether that's the case. They should really think about the kind of personal information they're putting up that risks being acquired and sold on the black market, he said.

"The issue is not that they're huge trades," said Molnar. "They're high volume, low margin trades in this kind of software. It's not so much about directing the money, it's about gaining stolen credentials that can be used in other parts of the Internet."

But if you can make the robo-advisor model work (and work safety) Hamza says, these "couch potato of portfolios" could be a great addition to the financial services industry because they would ensure your portfolio is diversified.

They would also take the focus away from day-to-day movement of stocks, a habit investors don't necessarily benefit from but find difficult to break.

"The whole perspective of these robo-advisors is that you're really focusing on the forest on not focusing on the trees," Hamza said. "It takes the conversation away from buying and selling this stock and it takes it away from the day-to-day looking at investments and tends to take a much bigger asset class viewpoint."

Follow @maurinor on Twitter.

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Glenn January won't blame offensive line for first loss

View more like this

Photo Store Gallery

  • PHIL.HOSSACK@FREEPRESS.MB.CA Winnipeg Free Press 090528 STAND UP...(Weather) One to oversee the pecking order, a pack of pelican's fishes the eddies under the Red River control structure at Lockport Thursday morning......
  • A goose cools off Thursday in water at Omands Creek Park-See Bryksa 30 day goose challenge- Day 25– June 21, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

Poll

Do you like Gord Steeves’ idea to sell four city-owned golf courses to fund road renewal?

View Results

View Related Story

Ads by Google