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.  

* Nov 2019 Update: Since this article has been written almost 2 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.
  • While routine portfolio management is conducted through complex algorithms and artificial intelligence-based computers, there is a lot of human oversight of these processes – including when on-boarding new clients and making key portfolio rebalancing/re-designing decisions.
  • 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.

Robo Advisors aren’t a new or novel concept. In the USA, they’ve been around since 2008, and are used to manage billions of dollars in client assets today. However, as a concept, automated portfolio management tools have been around even longer – as far back as the mid-2000s.  Today, Canada’s Robo Advisory landscape includes well-known names like BMO (SmartFolio), Questrade, Virtual Brokers, WealthBar, Wealthsimple and a dozen others who manage a range of investment portfolios, from RRSPs and RESPs, to taxable and Tax-Free accounts (TFSAs), for Canadian clients.  

You can discover more information about what possibly may be the best option for you, namely, Wealthsimple, reading Maple Money’s Wealthsimple review or the more recent one 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.

And speaking of safety, Canadian Robo Advisor clients enjoy the benefit of an even stronger regulatory safety net than many of their U.S-based counterparts. In fact, the Canadian Securities Administrators (CSA) holds that:

“By comparison {to their U.S counterparts}, Canadian online advisers can be seen as providing hybrid services, in that they use an online platform for the efficiencies it offers, while ARs {Advising Representatives} remain actively involved in (and responsible for) decision-making”

This official distinction should reinforce the trust of potential of Canadian Robo Advisor investors. But there’s more!

While some U.S jurisdictions allow Robo Advisors to opt out of their fiduciary obligations, Canadian regulators currently prohibit Robos from doing so. This means that any advice or financial transaction initiated on your behalf by a Robo Advisor must legally always be in your best interest – just as many traditional personal financial advisors currently provide.

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.

You can start by setting the risk tolerance to “low” and either select low risk ETFs on your own, or let the advisor help you out. Most platforms also offers “expert’ templates (for example Nestwealth) which you can copy for a ready-made portfolio, and later customize these even further to suit your personal preferences. No matter which investment vehicle you choose, the platform will immediately display the risk factor involved with it.

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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