Can Your Trust Robo Advisors With Your Pension?

Unless you have a very high level of confidence in your money-management skills, chances are that you are using the services of some type of professional money manager for your retirement and pension accounts.  While online brokerage accounts, mutual fund operators and money-centered financial institutions have been around for a while, the last few years have seen a growth in yet another type of Canadian investment advisory service: Robo Advisors.

The question that many would-be robo advisor clients have is: Should you trust a robo advisor with your pension accounts? Let’s dig deeper into this question to see what the answer is.  

* March 2024 Update: Since this article was written a few years ago, we have decided it is time to update it a little bit. Robo advisors have been steadily gaining popularity over the past few years, and our users are concerned with the safety offered by various providers.

Trusting a Robo Advisor: Myths Unraveled

Can Your Trust Robo Advisors With Your Pension?
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You have worked hard to build your pension savings. It’s therefore understandable, especially if you are nearing retirement, if you question who it is that you are about to hand over your savings to. When the average pensioner hears the word “Robo”, it immediately raises a connotation of a bunch of faceless robots!

That’s a myth and an urban legend!

On the contrary, Robo Advisors are staffed and managed by some of the most experienced and reputable money managers in the profession. The reason that they are perceived as a group of cold, faceless machines, is due to the term “robo” (synonymous with Robots) attached to what they do.

Here’s the truth however:

  • The term “Robo” is used to define a set of automated protocols, put in place by robo advisory platforms, that help investors manage their day-to-day interaction with their accounts.
  • However, most critical transactions carried out by Robo Advisors are overseen by professional and experienced human advisors.*Lately, more and more with the help of AI tools*.
  • Recent advancements in artificial intelligence (AI) and machine learning have significantly enhanced the efficiency and sophistication of robo-advisors. These technologies now enable more advanced tax-loss harvesting, better portfolio customization to meet individual investor goals, and improved overall investment performance. Despite the heavy reliance on AI for day-to-day portfolio management, the trend towards hybrid models combines this automated efficiency with the personalized touch of human financial advisors. This approach ensures that critical investment decisions and client onboarding processes benefit from human expertise, offering a balanced mix of technology and personalization that caters to the diverse needs and preferences of investors.
  • Many Robo Advisors employ “circuit breaking” technologies on their platforms. These act as trip-wires, that prevent the automated processes from moving too far ahead, in the event something “out of the ordinary” occurs within the portfolio.

The robo-advisory market has experienced remarkable growth, with its value reaching $7.39 billion in 2023 and projections indicating a surge to $72.00 billion by 2032, showcasing a compound annual growth rate (CAGR) of nearly 29%. This growth underscores the increasing trust and reliance investors place on robo-advisors for managing their assets. In the USA, where robo-advisors first emerged in 2008 with pioneers like Betterment and Wealthfront, they have since become integral in managing a significant portion of client assets.

Similarly, in Canada, the robo-advisory landscape has evolved to include major players such as BMO (SmartFolio), Questrade, Virtual Brokers, WealthBar, and Wealthsimple, offering a wide array of investment portfolios including RRSPs, RESPs, taxable, and Tax-Free Savings Accounts (TFSAs). This expansion reflects the broadening appeal of robo-advisors across diverse investment needs and client demographics.

Recent data highlights a significant shift in investor behavior, with robo-advisors experiencing a surge in adoption rates, particularly among millennials and Gen Z investors. Studies show that these demographics appreciate the convenience, affordability, and digital-first approach of robo-advisors, with many using these platforms as their primary method for investment management.

As of the latest reports, a substantial portion of new investments among younger investors is being channeled through robo-advisory services. This trend is indicative of the growing confidence in robo-advisors’ ability to manage investments effectively and the broader acceptance of these platforms as a mainstream investment solution.

The increasing reliance on robo-advisors underscores their success in democratizing investment management and making it accessible to a wider audience.

You can discover more information about what possibly may be the best option for you, namely, Wealthsimple, reading the recent review published at Million Dollar Journey.

Safety First

If you are still wary about entrusting your pension or retirement savings to a team of Robo Advisors, consider the following:

If you currently have your pension or retirement investments being managed by some of Canada’s leading banks – like BMO, National Bank or Royal Bank, you already have your money invested with “owners” of various Robo platforms. These reputed institutions, who collectively manage billions of dollars in Canadian pension and retirement assets, have stakes in various Robo Advisory solutions. If they believed that Robo’s aren’t a safe bet, they wouldn’t be offering those services to their clients.

Recent updates in the regulatory landscape have further solidified the safety and reliability of robo-advisors for investors. Both in Canada and the United States, regulatory bodies have implemented stringent measures to ensure the protection of investor interests.

In Canada, for instance, the regulatory framework mandates that all financial advice and transactions initiated by robo-advisors align with the client’s best interests, prohibiting any deviation from fiduciary duties. Similarly, in the U.S., the Securities and Exchange Commission (SEC) oversees robo-advisors with the same rigor applied to traditional financial advisors, ensuring transparency, fairness, and accountability.

These regulatory enhancements across North America not only bolster investor confidence but also underscore the commitment to maintaining high standards of safety and integrity within the robo-advisory domain.

If that’s not safe enough for you, consider this: Most Canadian Robo Advisors do not have direct control of your money. Instead, they use reputed 3rd-party custodians (like National Bank) to hold, buy or sell investments in your account. What this means is that your Robo Advisor-managed pension and retirement accounts are eligible for protection under the Canadian Investor Protection Fund’s mandate.

With so much governance and regulatory safety built into the Canadian Robo Advisory landscape, pensioners and retirees should have no inhibitions about using them as investment vehicles. Not only will your investments benefit from the use of state-of-the-art technology, but you’ll also enjoy amazingly low management fees as well, leaving more of your hard-earned money in your pockets.

Are Robo Advisors the right choice for you?

We have recently published a dedicated article detailing the various pros and cons of using Robo Advisors. In short, while Robo Advisors are a tool anyone could benefit from using, it is especially tailored for certain type of investors. Much lower transaction fees and and a very low required minimum balance make them the ideal choice for young investors without a lot of capital.

Robo-advisors have refined their fee structures to become even more investor-friendly, with many now offering tiered pricing models based on assets under management (AUM) or access to additional services. Typically, fees range from as low as 0.25% to 0.50% of AUM annually, making them a highly affordable option for investment management. Furthermore, some robo-advisors have introduced subscription-based models, providing unlimited access to robo-advisory services for a flat monthly or annual fee.

This evolution in pricing ensures that investors can select a service level that matches their investment size and needs, making professional portfolio management accessible to a broader audience.

Additionally, the transparency and competitiveness of these pricing models underscore the value proposition of robo-advisors in today’s investment landscape.

Robo-advisors now offer a wider array of investment options, catering to the evolving investor demand for diversity and ethical investing. This includes portfolios focused on Environmental, Social, and Governance (ESG) criteria, allowing investors to align their investments with their values. Additionally, some robo-advisors have begun integrating cryptocurrency investments, providing exposure to digital assets within a regulated framework. For those seeking a more tailored investment strategy, customizable portfolios are available, enabling investors to adjust asset allocations based on specific financial goals or market conditions.

Robo-advisors have significantly enhanced their platforms to offer an even more intuitive and accessible user experience, catering to the digital-first preferences of today’s investors. Recent updates include streamlined mobile apps that offer full functionality on the go, advanced customization options for personalizing the dashboard, and interactive tools for goal setting and tracking progress.

Accessibility features have also been expanded, ensuring that investors with disabilities can navigate and use robo-advisor services effectively.

These improvements not only make investing simpler and more engaging for users but also demonstrate the commitment of robo-advisors to inclusivity and meeting the diverse needs of their client base.

Combining low costs with low risk makes Robo Advisors an ideal choice for small time investors. The fact you get expert advice on top of that, makes them a very reliable and safe investment option. If you are looking for a low effort, fairy automated solution or you don’t want to commit too much capital then you should strongly consider one of the options suggested in this article as they provide the best ROI for this type of portfolios, mainly thanks to the very low fees you pay.

That said, while Robo Advisors are constantly evolving and improving,  they still don’t provide the best option for more serious investors with larger capital that are looking to take more risks and increase their margins. When you own a large portfolio you can usually negotiate fees down anyway, so this advantage of Robo advisors is somewhat mitigated. More importantly, Robos aren’t personalized enough and fit more to an auto pilot approach which isn’t usually the right way to go with a large portfolio.

Learn more about Canada’s robo advisors, and find out what they can do for your pension and retirement savings.

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