While robo-advisors still make up a small percentage of the asset management industry, they\u2019re disrupting it with automated, low-cost solutions that appeal to digitally savvy investors.<\/p>\n
A robo-advisor is an automated investment service that can build and manage your portfolio \u2014 based on your goals and risk tolerance \u2014 using AI-based algorithms. Some services are fully automated, while others offer limited human interaction.<\/p>\n
As Morningstar puts it: \u201cRobo-advisors occupy a middle ground between a wealth manager and a do-it-yourself trading platform (1).”<\/p>\n
The growth of the robo-advisor market is being fuelled by \u201cthe growing millennial and Gen Z investor populations who are digitally native and comfortable with technology-driven financial management\u201d as well as a \u201crising preference for personalized financial planning, particularly amongst individuals with smaller investment portfolios,\u201d according to a report by Data Insights Market (2).<\/p>\n
While Gen Z and millennials might be driving adoption, the DiMarket report notes that robo-advisor platforms are increasingly targeting high-net-worth individuals by offering \u201cpersonalized services and higher investment thresholds.\u201d<\/p>\n
Compared to human financial advisors, robo-advisors offer a low-cost alternative \u2014 especially for investors with smaller amounts of money to invest.<\/p>\n
In 2024, the median robo-advisor fee was 0.25%, according to Morningstar (3). However, the fee could be slightly lower or higher, depending on the platform. It\u2019s sometimes paid as a flat monthly rate or annual fee.<\/p>\n
Human advisors offer a few different fee structures. Many charge an AUM (assets under management) fee, which is a percentage of your assets. Typically it\u2019s 1.0% to 2.0% a year in Canada (4). They might also charge by the hour, offer a flat monthly or annual retainer fee or work on commission.<\/p>\n
But they may have \u2018hidden\u2019 fees, such as management expense ratios (MERs) in mutual funds and exchange-traded funds (ETFs). So even if you\u2019re paying a 1% management fee to your advisor, you could also be paying a 1% MER fee within a mutual fund, for a total of 2%.<\/p>\n
Robo-advisors, too, may have fees on these underlying funds \u2014 plus, there could be account maintenance or trading fees. So there\u2019s more to consider than the flat monthly fee. In some cases, a robo-advisor platform might offer an \u2018all-in\u2019 fee that can range from 0.5% to 1%.<\/p>\n
You don\u2019t need to be filthy rich in order to get started with a robo-advisor. According to Morningstar, about a quarter of robo-advisor platforms only require an account minimum of $50 or less (5).<\/p>\n
This could be an option for those who only have a small amount of money to invest (where it wouldn\u2019t make sense to pay a percentage of assets under management). Also, some human advisors may have high minimum investment requirements or only work with high-net-worth individuals (6).<\/p>\n
Robo-advisors could also appeal to new investors without a lot of institutional knowledge or more experienced, digitally-savvy investors who are comfortable with technology.<\/p>\n
But not all robo-advisors are the same. Some may offer additional services, such as tax-loss harvesting, which helps you reduce the taxes you pay on any investment gains. So it\u2019s worth doing your homework to find the right platform for your needs.<\/p>\n
A human advisor can offer advice for larger, more complex portfolios, as well as long-term financial planning, including estate planning, tax planning and insurance and risk management.<\/p>\n
A human advisor can also provide reassurance and support during major life events or downturns in the market, possibly helping to prevent panic-selling.<\/p>\n
Read more: What is the best credit card in Canada? It might be the RBC\u00ae British Airways Visa Infinite, with a $1,176 first-year value<\/a>. Compare it with over 140 more in 5 seconds<\/p>\n Robo-advisors help take the emotion out of investing, which could potentially result in better returns. But they don\u2019t necessarily outperform traditional financial advisors; it depends on various factors, including your risk tolerance, which securities you\u2019re invested in and even the quality of the algorithm (7).<\/p>\n Robo-advisors surveyed for The Globe and Mail\u2019s 2024 Robo-Advisor Guide said investors generated after-fee returns ranging from 22% to 26% for the year (ending Sept. 30). However, three-year annualized returns were lower, ranging from 5.5% to 8%.<\/p>\n With a human advisor, you can always pick up the phone and have a conversation. But what happens when your robo-advisor makes decisions with your portfolio that you don\u2019t agree with?<\/p>\n \u201cWhen your AI stock-picking assistant mixes up a disastrous portfolio, you might be tempted to take it to court. But unfortunately, the algorithm itself can\u2019t be sued since it\u2019s not a real legal person,\u201d according to Legal Reader (8).<\/p>\n While human advisors have a fiduciary duty to put their clients\u2019 interests ahead of their own, robo-advisors could breach this duty if the AI system \u201cmakes choices that benefit itself or the company more than the client,\u201d such as recommending investments that earn higher fees for the company.<\/p>\n \u201cHowever, this is a new area of law, and courts still need to deal with many cases like this,\u201d according to Legal Reader (9).<\/p>\n For those who prefer to use a robo-advisor but want the support of a human, they may want to consider a hybrid option instead. Some robo-advisor platforms give you the option of working with a human advisor from time to time \u2014 though it may come at an additional cost.<\/p>\n We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines<\/a>.<\/p>\n Morningstar (1<\/a>, 3,5<\/a>), DiMarket (2<\/a>); Cooper Pacific (4<\/a>); SmartAsset (6<\/a>); Investopedia (7<\/a>); Legal Reader (8,9<\/a>)<\/p>\n This article provides information only and should not be construed as advice. It is provided without warranty of any kind.<\/p>\n","protected":false},"excerpt":{"rendered":"While robo-advisors still make up a small percentage of the asset management industry, they\u2019re disrupting it with automated,…\n","protected":false},"author":2,"featured_media":245422,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[115044,45,49,48,133,43584,61371,115042,115043,57470,131,132,64880],"class_list":["post-245421","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-aum","tag-business","tag-ca","tag-canada","tag-finance","tag-financial-advisors","tag-human-interaction","tag-investment-portfolios","tag-investment-service","tag-morningstar","tag-personal-finance","tag-personalfinance","tag-risk-tolerance"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/245421","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=245421"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/245421\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/245422"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=245421"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=245421"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=245421"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}