Robo-Advisors: How to Put them to Work for You

Robo-Advisors have been operational for several years. Yet, they remain shrouded in mystique. Over the years, dozens of mainstream robo-advisors have made their way to market and are …

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Robo-Advisors have been operational for several years. Yet, they remain shrouded in mystique. Over the years, dozens of mainstream robo-advisors have made their way to market and are particularly popular with newbie investors. The traditional investment landscape is so convoluted that it’s difficult to get up and running without substantial capital in place. However, these robo-advisors feature low minimum deposits and no in-depth knowledge of the financial markets.

Many of us can relate to the concept of automated systems helping us in everyday life. Consider the virtual profusion of AI intelligence from everything including smart refrigerators, smart cleaning systems, smart security systems, et al. It comes as no surprise that a robo-advisor is arguably one of the most intelligent ways to invest hard-earned funds in stocks, commodities, indices, currency pairs, bonds and other financial instruments. The objective of these systems is to build a viable financial portfolio through a ‘handpicked’ selection of funds.

There’s more to robo-advisors than simply depositing cash and going about your business. While these automated investment services are designed to manage your portfolio of assets, they do so by way of man-made algorithms. Among the many benefits of using a robo-advisor is portfolio rebalancing, picking top investment options, and providing services at a fraction of the cost of a human advisor. Charles Schwab conducted analysis of the robo-advisor industry, and found that the assets under management (in billions of dollars) have increased sharply over the years.

  • In 2015, robo-advisors managed $47.3 billion worth of assets
  • In 2016, robo-advisors managed $98.5 billion worth of assets
  • By 2022, Charles Schwab predicts a whopping $460 billion worth of assets under management to robo-advisors.

What do these investment tools and resources do?

The short and sweet of it is that robo-advisors evaluate a trader/investor’s personal preferences against market forces to determine the best possible portfolio of investments. Personal preferences vary from one individual to the next, but typically encompass the following elements:

  • Your appetite for risk
  • Your financial objectives
  • Your investment timeline
  • Your preferred investment portfolio
  • Your funds available for investment

The uncontrollable variables include the factors that are outside of your control as a trader or investor. These encompass market volatility, exchange rate fluctuations, economic performance, macroeconomic variables, geopolitical considerations, alternative technologies and so forth. Remember, these online advisors use sophisticated software to manage your investment portfolio. Most of this is done with no human interaction. Fortunately, there is always someone at the end of the line if you need a human advisor.

Getting started with a robo advisor requires a brief workup. A questionnaire must be completed to assess precisely what an investor or trader is trying to achieve. This could be something as simple as purchasing a vehicle, to more complex undertakings like purchasing a home, or planning for retirement. Once this information has been plugged into the system, the robo-advisor’s ‘brain construct’ kicks into action. It will build a diversified portfolio of assets which best serves your investment needs.

A basket of investments will be hand-picked by a team of investment professionals which best meets your criteria. Certain assets are preferred for risk averse individuals, while others are better suited to growth-oriented individuals. In all instances, the type of asset class that is chosen is known as an ETF (Exchange Traded Fund). Different types of ETFs are available through the investment platform, each of which is geared towards a specific timeline, yield, and risk preference.

What factors determine the type of investment you should choose?

When choosing a robo-advisor, it’s important to understand what you want to get out of the deal. It all begins with the type of account you are selecting – will it be a trust, a 401(k), or a retirement account? Next, pick your robo-advisor based on your minimum investment availability. Some people consider $10,000 to be an affordable minimum investment, while others prefer a $1,000 investment minimum. There is plenty of latitude in this domain, but it’s important to pick a robo-advisor that meets your minimum investment figure.

During our analysis of robo-advisors, we scoured the literature in search of preferred brokers and online investment platforms. Our in-depth analysis led us to a review of Wealthsimple. This online platform is particularly well-suited to automated trading activity, given its ‘investing on autopilot’ paradigm. It’s worth pointing out how all of this works. Whether you’re a first-time investor or an old hand at the stock market, you know that there are multiple components to every financial portfolio.

With Wealthsimple, everything is simplified. That’s the beauty of this de-cluttered online trading platform. You get to select your risk preference – low risk (conservative) or high risk (growth oriented). As you toggle the button from left to right, you will see a mix of assets to add to your portfolio. As a case in point, consider a risk averse (conservative) financial portfolio. This includes a majority of short-term bonds, high yield bonds, and government bonds. Stocks do not feature prominently in this type of portfolio. With autopilot investing, you simply set your risk preference and the robo-advisor system will take care of your entire financial portfolio.

If you prefer a growth-oriented financial portfolio, then precisely the opposite is required. Your portfolio will include a majority of stocks and a minority of bonds. For example, you may find a concentration of US stocks, Canadian stocks, foreign stocks, and emerging market stocks in your portfolio, and a minority of government bonds, and short-term bonds. Whatever your preference, the autopilot mode automatically reinvests your dividends, automatically rebalances your account, and automatically deposits funds to allow your portfolio to continue growing. This robo-advisor system works best with experienced traders, novice traders, and anyone in between.

How do you evaluate the quality of the Robo advisory service that you using?

You will read many articles about this service or that service. But at the end of the day it all boils down to just one word – performance. If a robo adviser is not generating the type of returns that it promises, it’s not worth anything. Fortunately, the most reputable robo-advisory services have passed the litmus test of public scrutiny and they have delivered good on expectations. Remember, most of the time, the premier online trading services, notably robo-advisory services have the backing of award-winning economists, traders, investors, and analysts. The personal financial planners, trading experts, and investment brokers involved in each of these projects have much at stake, including their reputations.

The best services recognize that people have different preferences when it comes to finding the right investment vehicle for their needs. In our case study for example, they provide corporate portfolios, joint accounts, LIRA options, RRIF, RESP, personal accounts, TFSA and RRSP retirement accounts. Each unique option is geared towards a different outcome. Recall the personal preferences of clients earlier in our guide? Timeline, funds, objectives? Online brokers need to provide accounts that are best suited to a trader or investor’s needs.

In addition to the typical services provided by these tools (rebalancing, tax-loss harvesting, retirement planning, etcetera), there are also hybrid services available. A hybrid service offers the automated service and the human advisor, side-by-side. This option is increasingly popular with people who prefer traditional investment styles and cutting-edge technology at the same time. Be advised that the costs of these services vary wildly from as little as 0.25% – 0.89% in yearly management fees, but the costs are substantially lower than you would pay a bricks and mortar brokerage per trade, per month, and per annum.


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