Why Robo Advisors Aren’t Just for Millennials

When you hear the term “robo advisor” and see many of the advertisements that have pervaded Canadians’ social media feeds, you couldn’t be blamed if you believed that this was another “Millennial fad” or some “online thing” aimed exclusively at young people.

The truth is that while Millennials are obviously the primary target for most of the robo advisors that are emerging as market leaders, we have had many supportive comments come from Gen Xers and even Baby Boomers over at our Canadian Robo Advisors Guide. Interestingly, while young people might be attracted to robos because of their convenience and shiny online platform, it is the older generations that have more investable assets – and consequently a lot more to save when it comes to the commission-based structure of traditional investments versus robo advisor costs.

Why Commissions Matter

If you and your significant other are 40 years old and you’ve managed to put away $100,000 into your investment nest egg over the years, you are likely paying somewhere in the neighborhood of $2,500 per year for investment advice in Canada if you subscribe to the traditional mutual fund commission advice model. That 2.5% drag on your compounded returns is going to really affect the long-term status of your balanced portfolio.

Let’s say we take this hypothetical Gen X couple and we project for them to save a combined $10,000 per year going forward. (Admittedly, that’s a high number, but hopefully at 40 our King and Queen have paid down some of the large early-life debts and are well on their way to climbing their respective salary ladders at work.) If they were to invest through robo advisors and take advantage of commission rates in the neighborhood of .4% per year, they’d end up with a combined nest egg of around $750,000 (assuming a 5% rate of return). If they stick with their Big Bank Funds (and I’ll be very conservative with the commission here) our young-at-heart 65-year-olds would be looking at a much more modest nest egg of roughly $580,000. That’s $170,000 in overall returns that evaporated over the 25-year period . And that’s of course assuming our Gen Xers want to retire at 65 – which may become increasingly rare.

Getting Used to a Different Advice Model

So clearly there is a raw dollars case to made for the lower commissions associated with the robo advisor model at any age. The remaining issue for a lot of people is the idea of trusting their money to something vaguely referred to as a “robot”. This misconception is the unfortunate result of very poor branding. The only thing “robo” or done automatically (without a human executing every single step) is the actual purchasing and selling of broad-based index ETFs. Literally every other step is handled by a human being.

  1. When you initially contact a robo advisor you will chat with a human being.
  2. When you decide on what your investment portfolio’s asset allocation will be – it will be with the guidance of human being, using human-created resources to determine your risk profile.
  3. If you have questions about investments, costs, commissions, or whether to use an RRSP or a TFSA – those will be answered by a human being.

Literally the only aspect of a robo advisor that will not be handled by flesh and blood people is the rebalancing of your investment portfolio back to the asset allocation that you initially set up.

It’s also worth mentioning the any advice that you receive from a major robo advisor in Canada will be held to a higher legal standard than that of someone who merely calls themselves a financial advisor. This odd circumstance is a result of the fact that the major robos are all certified as portfolio managers. This title means that they have what is known as a fiduciary duty when they give advice – basically whatever they recommend has to be in your best interests as the client. It might seem crazy, but this same standard does not apply to many people that deal with Canadians’ finances everyday. Next time anyone gives you financial advice – whether they are with a well-known Canadian Bank or credit union – ask if they have a fiduciary responsibility to you. If they don’t, they are free to sell you whatever products they wish and they cannot be held legally responsible – even if those products are a terrible fit for someone in your position (and that are usually accompanied by a nice little kickback).

Now, all of this being said, all of the robo advisors purport to give financial advice to varying degrees. For most Millennials, financial advice is pretty straight forward. Pay down high interest debt, pay yourself first, save a solid chunk, invest for the long haul. But many Gen Xers and Baby Boomers have somewhat more complicated financial needs due to having more assets and shorter investment horizons. I recommend simply leaving your investment choices to a robo advisor – and your financial planning to a financial planner.

This might sound counterintuitive. Most Canadians still receive “financial planning” across Canada “for free” (or at least that’s what they are told before they are asked which high-fee mutual fund they want to buy that year). For folks with a significant amount of assets, they could easily be paying $20,000+ in commissions each year for advice that could be summed up as, “Let’s continue on the same plan as before, but buy more mutual funds this year.” What I recommend instead is paying for financial planning like you would any other service.

When you go to a lawyer you get an upfront quote right? When you see an accountant they tell you how much it will cost to file your taxes for that year? If you leave your investments to a robo advisor, you can get excellent financial advice at a flat rate from a fee-only financial planner. This planner’s only concern will be your financial plan (what a novel idea) instead of trying to sell you investments. I think that this robo + specialist option is a much better way of getting unbiased financial advice – and it is almost guaranteed to produce better investment outcomes over the long term as well due to the basic math behind index investing vs active investing.

Determining if Robo Advisors are Right for You

Perhaps you’re the type of person that likes to a read several personal finance articles every week and is comfortable handling their own DIY portfolio. In that case, you’ll probably be just fine without a robo advisor. The problem is that most Canadians don’t fit into that category. Instead, many Canadians continue to muddle along with the traditional setup of an under qualified financial advisor that is paid largely based on what terrible investment products they recommend, as opposed to how well they plan your finances. Many of these Canadians are intimidated by the idea of opening up their online brokerage account and buying ETFs to create their own portfolio. For this large group of people, robo advisors might represent the perfect balance of paying for advice, but still keeping most of their money working for them. If you want to read more on the topic or want help deciding which of Canada’s robo advisors are right for you, head to YoungandThrifty.ca where we have in-depth reviews of all of Canada’s robo advisor options.

Written by Kyle Prevost

Kyle Prevost is a business teacher and personal finance writer helping people save and invest over at MyUniversityMoney.com and YoungandThrifty.ca. His co-authored book, More Money for Beer and Textbooks, is available in book stores.

12 Responses to Why Robo Advisors Aren’t Just for Millennials

  1. Kyle,

    I glanced at the 2 websites listed in your “bio”. I started to worry after spotting typos. Then I realized the YoungandThrifty.ca website info is years out-of-date.

    The “robo” technique is not new. One of the mutual fund companies had it earlier this century.

    Maybe it’ll work for some people who would rather have someone else make decisions for them, just like some people eat 3 meals a day at restaurants and have a chauffeur.

    Over the decades, I’ve been seriously disappointed by dozens of financial advisors or advisers and financial gurus of all types. I’ve learned that one can spend a lot of time learning about those people, the institutions they work for, the hidden agendas they may have. None have been forthcoming: they answer questions, tell you things they think you might like to know, are rarely forthcoming.

    I shunned all when I turned 56. I spent time getting educated about making my meagre retirement fund work for me. It is so much easier today than it was in the last century mostly because of the Internet and search engines.

    MERs are not a problem when I make money, money as in CASH.

    How frequently and reliably is CASH paid out to me? Monthly and for years are the answers.

    What is the rate of return, gross and net, paid to me in CASH? At present, I invest when my rate of return is at least 8% gross. I don’t worry about net specifically: I only invest in tax-advantaged income such as dividends and I prefer return of capital.

    How liquid is my portfolio? All of my portfolio holding can be liquidated in seconds in a dire personal emergency.

    How much time does it take to monitor and manage my portfolio? By July 22 2017, today, I have spent 12 hours this month and that includes time consulting with daughter about her portfolio. I am definitely not a day-trader.

    Can I monitor my portfolio on a trip anywhere? Yes. What more can I add to a simple realistic yes.

    If I had applied this approach or asked these questions when I was 40 or 50, I would be a millionaire today.

    There’s ad running these days that must be a joke, a sad one because it is an insult to the target audience. The ad says something about an amazing rate of interest on your savings. Can you imagine what the rate is? 10%? No. 5%? No. It’s 2%! By the time you pay income tax on the earnings you are earning less than the rate of inflation. Actually, you are earning less than the real rate of inflation before income taxes are applied.

    The ad is also a reflection on the personality of all banks, and the perception they have of their clients – that they are ignorant, gullible and stupid. A bank can legally lend out its deposits on hand about 10 times. Your dollar deposited in a bank can be converted into 10 loans at 2-3 times the 2% they are paying the depositor. In other words they can earn at least 40% on the 2% they pay you; their net is 38% before bad loans. Banks, all of them, are not your friend; they need you more than you need them.

    You need to educate yourself about managing you own money long before you decide letting another person or software do it for you.

    Give your self a schedule: (almost) every week for 1 year skip a few Kardashian episodes or a sports event and go digging on Kyle’s websites, go to the library, get familiar with the stock and dividend screeners on TMXMONEY or GOOGLE/finance.

    You can run today, but you started out flat on your back.

    I purposely avoid currency exchange issues. I have global diversification from the Canadian funds or stocks I buy.

    My gross monthly income has been over 12% since 2006 or so. At present it is closer to 17%. My portfolio value is up about 6% for 2017 and my CASH monthly income is up about 8% in 2017. I pay zero income tax on about 17% of my income – it’s my TFSA that I call TFiA (investment not savings).

    Guarantees? None. If you want guaranteed, look up that ad, earn 2% and starve.

  2. Hey Claude,

    Glanced through your comment and started to get worried after realizing you have no credibility or consistent logic to speak of, and many of your “facts” are mostly wrong. The majority of your thoughts are aimless meanderings designed to humble-brag about your non-verifiable accomplishments. Please try to add value to the world the next time you spend so much time tapping your keyboard. I only have time here to briefly refute a few of the most glaring inaccuracies.

    1) Young and Thrifty is 98% up to date. Obviously with many articles written years ago I can’t say that there is 100% accuracy given current realities. The “robo technique” that you reference is not brand new, however as a general concept for retail investors it is still relatively recent – especially in Canada. The fact that CBC recently interviewed me on the matter is proof enough that the general public is only now becoming aware of the option.

    2) One would think that for someone that admits to taking until the relatively advanced age of 56 to “know it all” that you’d be a little more humble about addressing a method of investing chiefly aimed at people that do not seek to “know it all” and in fact will almost assuredly build wealth much faster than someone who has jumped from guru to guru in their quest for CASH NOW!!!

    Your apparent obsession with “CASH” (dividends?) at the expense of MERs is worrisome and is terrible advice for anyone reading this article. Why should you care if investment returns come to you in the form of dividends or capital gains if you are investing within your registered accounts?

    3) Your obsession with liquidity is also kind of worrisome from a psychology standpoint, but I’m not sure what relevance it has beyond showing how vulnerable you are to a market fluctuation, because robo advisors would invest in the same liquid securities that most Canadians invest in anyway (stocks, bonds, maybe REITs).

    4) Most Canadians don’t want to monitor their portfolio on a trip. So that convenience is worth quite a lot.

    5) The fact that you think that you can outperform hedge funds, super computers, and other professional traders by actively trading against them by doing research on your cell phone app 12 hours a month is kind of humorous to me. Please do yourself a favour and read some basic active vs passive investing material before making ridiculous claims.

    6) I have no idea what “2% ad” you’re referring to, the context of it, or the relevance to an article about robo advisors. Most assuredly the only thing it serves to highlight is the tenuous grasp you have on basic investing fundamentals.

    7) Yes, people should educate themselves, but the vast majority of Canadians get intimidated by this process and end up going with the traditional high-MER traditional advisor/mutual fund model instead of taking control of their own finances. A robo advisor is a great model for people looking for a mid-way solution.

  3. $2,500 in comp on 100k?? That’s so misleading!! If you manage your own money or not your going to pay an fund fee of around 0.5 – 1%, weather you have an advisor or not. Sure you can use an ETF for .10 but so can your advisor! Advisors generally charge 1%…. so having professional advice for $1,000/year on $100k isn’t worth it? Your not just getting advice on that 100k either… you’re getting budgeting advice, government benefit advice, tax advice, retirement planning, I could go on forever. You’re article is a joke, check both sides of the fence before you post an article.

    • Kroy,

      MERs don’t matter as much as the return.

      For instance if the fund manager is charging 1.6% MER and the fund in question has been paying you monthly cash for 150 months you, the investor, can make decisions: use the cash as a retiree (or a new car) or re-invest the distribution.

      When you choose to re-invest, the rule of 72 will mathematically compute when your initial investment will double, regardless of the type of account the fund is registered in (Open, Margin, RRSP/RRIF, TFSA, other).

      Is this guaranteed? As much as anything can be guaranteed. The criterion is return on investment/deposit. If a fund has been paying me the same monthly amount of cash per share/unit for 150 months, that is a track record I choose to bank on.

  4. Big learning for me was that robos are run by portfolio managers with a fiduciary duty. That raises their stature in my mind considerably. Thanks for highlighting that.

  5. Sad that you think $10,000 for a couple is a lot to put away,currently doing $26,000 on my own with a middle class income..No wonder so many people are financially screwed in this country.

  6. I like to know how Survivor Allowance works- if a person is widow she is 64 years old, her husband was receiving old age pension and he has passed away in 2016. Her income in 2016 was $7,000 disability pension. How much survivor allowance she will get from July 2017?

  7. “Instead, many Canadians continue to muddle along with the traditional setup of an under qualified financial advisor that is paid largely based on what terrible investment products they recommend, as opposed to how well they plan your finances.”

    Sorry buddy, you lost a lot of credibility with this cheap shot generalization.

    Make your case without trying to drag others down into the mud with you.

    Good luck selling more books.

    Dave McMillan.

Leave a reply