Pros and Cons of Robo-Advisors: Everything You Need to Know

A robo-advisor is one of the best things to ever hit the financial planning industry. In today’s high-tech world, it’s clear that the fintech industry is on an upward trajectory to success. Robo-advising services are no different. These services are completely digital. They use a client’s financial information, future goals, and risk tolerance to calculate the best possible financial planning advice and investment recommendations based on mathematical algorithms.

The best part is that these services are a fraction of the cost of more traditional (read: human) investment firms or wealth management companies. Of course, regardless of the benefits that may seem clear, it’s important to do the research and weigh the pros and cons of any new service when it comes to dealing with your finances.

Robo advisors are highly popular in Canada and particularly among younger and savvier audience. The reason for its popularity lies in its simplicity combined with high level of trust. The leading Canadian robo advisors (which could be considered the best robo advisors in Canada) are: Wealthsimple, BMO Smartfolio, Nest Wealth, Justwealth and Modern Advisor. 

Who is using robo-adivsor services in Canada?

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Well, to put it simply, everyone is using robo-advisors. Robo-advisors make it easy to afford investing, which is a large part of their draw. Their upfront cost is low, their annual fees are often a quarter of traditional investment annual fees, and they have low or no account or net worth minimum for clients. This makes robo-advisors ideal for new investors who are looking to get started without committing to the incredibly high cost of traditional financial planners or wealth management firms.

Investing to save for retirement with robo-advisors or reach a long-term financial goal but doesn’t have a ton of funds to invest now. However, even if you don’t fit the “new investor” bill, robo-advisors can still be a good option. If you’re a busy professional who doesn’t want to spend the time and energy managing your portfolio, but you also don’t’ want to pay high fees and upfront costs, a robo-advisor is still a good option.

What are the negatives of using a robo-advisor for financial planning and investment management?

Although robo-advisors have many benefits (which we’ll go over in just a second), they also have several drawbacks. First, it goes without saying that when you work with a robo-advisor, you’re losing the personal touch of a human financial planner. A large part of money management, financial planning, and investing is emotional. A robo-advisor will not be able to help you manage your mental and emotional approach to your money. Only a trained financial advisor can help you overcome mental blocks, embrace risk-taking investments, and dig deeper to understand your spending and budgeting habits.

A robo-advisor is also not perfect all the time. Granted, neither is a human financial planner, so this is a problem that you’ll run into regardless of what type of advising you choose to go with. The algorithms that robo-advisors use are generally mathematically sound. But market shifts and unexpected changes in your employment or ability to continue funding your retirement accounts are often unpredictable aspects of planning.

What are the positives of using a Canadian robo-advisor?

Of course, the low fees that many robo-advisors offer is the primary reason that people are drawn to them. While many professional financial advisors charge 1.0% or more to manage your assets annually, several robo-advisor services charge 0.25%. Additionally, the upfront cost is lower, as well. Robo-advising companies can offer such low fees and upfront costs because they have fewer costs themselves. They don’t have salaries of advisors or wealth managers to pay – all of their services are automated. Some robo-advising services do have certified professionals you can speak with – but there are only a few of them and the robo-advisor service has the capability to take on way more clients than a traditional financial planner could.

The accessibility and ease of use is another big selling point. Robo advisors are set up to be simple to use. All of the original survey questions about your financial situation are done online. Investment can be completely automated after they run your information through their algorithms, as well, which means you’re actively investing but you’re entirely hands-off. In today’s busy world, that is often worth it for people. Finally, robo-advisors are machines. They eliminate human error, and their algorithms are often award winning. For someone who has a simple, straightforward financial situation, it’s likely that a robo-advisor will produce excellent investment results for them.

There will always be pros and cons to any investment service or financial planning firm you choose to work with – whether they’re human or automated. However, robo-advisors have many benefits and are worth considering as an option. As you’re making your decision, be honest with yourself about whether or not you’ll prefer the involvement of an actual person in your investing experience. If that’s not a concern, and you’re not overly experienced in the investing world and will want to micromanage your portfolio, a robo-advisor might be for you.

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