Robo Advisors: How Simple Beats “Sophisticated”

If I had a toonie (inflation-adjusted idiom) for every time a newly-converted passive investing devotee asked me, “I’m all set with my ETFs, but is now the right time to get into the market?” or “Yeah, I’m all about easy indexing now, but I read an article that says I can supercharge my returns by using a hedged, double-leveraged inverse gold index for part of my portfolio?”

… well, I wouldn’t be rich, but let’s just say I wouldn’t have to worry about my TFSA contribution this year!

There are many people out there who think the value proposition put forth by basic index investing principles and Canada’s robo advisors is simply too good to be true. Just check out the comments on our Wealthsimple review on Young and Thrifty for proof!

The idea that you can set up an automatic contribution the day after you get your paycheque, ignore everything else – and still come out ahead – just seems counterintuitive. After all, we’ve been told our whole lives that to accomplish big things we have to work hard, that we need to study to get ahead, and that you get what you pay for. The problem is that generally speaking, none of those things hold true when we’re talking about investments and traditional financial advice models.

Robo Advisors Help Most Investors Ignore the Noise

If you’re a Boomer and Echo fan (join the club) then you’re no stranger to index investing and have probably read Robb’s come-to-passive moment when he switched over from the dark side of active investing. I’m not going to preach another sermon to the choir here when it comes to why there are a lot of mutual funds (the vast majority) that are robbing people through incredibly high fees and underperformance.

Here’s the thing though, like Robb, I’ve been shouting the passive-beats-active message (especially given Canada’s horrendous mutual fund fees) for a long time now. The problem is that a massive gap exists between people who read my stuff, are convinced on a theoretical level that they need to get out of their bank’s mutual funds and into cheap passive investing options – and the actual execution of those simple passive investing strategies.

There are likely many reasons for this execution gap, including:

• Paralysis by analysis as readers feel they need to scroll every single blog post ever written on the topic, along with every blogger’s list of “Top Ten Books that Will Change Your Life”
• They watch an episode of Jim Cramer and believe that maybe picking stocks with part of their portfolio is a good idea – even though I tell them that a DALBAR study from 1990-2010 showed that while the S&P 500 had an average return of 9.1% for the twenty-year period, the average American stock investor achieved only a 3.8% return (due to attempts at stock picking)
• Banks and investment companies are really good at talking in circles and pressing fear buttons by saying things like, “I guess index investing is ok if you want to never retire because of mediocre/average investment returns”
• There simply hasn’t been many passive investing options available in Canada until a few years ago, and so we’re all playing catch up when it comes to sorting out this new normal & getting the real facts out there for public consumption.

Even when I look at just the readers I have who leapt over the gaping indexing execution gap (where early retirement goes to die), there is still an instinctual pull in their brains every time they go to mechanically rebalance their portfolio.

Logically, these individuals know that simply going into their discount brokerage account and rebalancing their bond index fund, their Canadian index fund, and their international index fund is very basic math. They know the statistics on failure if they deviate from this strategy. Yet for some reason, that simple act of seeing bright shiny investing symbols on stock market tickers triggers a large number of us to say, “Well sure, index investing is good for most, but hey I’m smarter than the average guy/gal since I read personal finance blogs. I bet I can beat the entity on the other end of this trade, even though that entity is most likely a NASA-level supercomputer running an algorithm created by a Wharton or MIT grad who works 70+ hours every week.”

This is where the robo investing model really shines. Sure there are lots of other perks offered by Canada’s leading robo advisors such as Wealthsimple, ModernAdvisor, and WealthBar. Some of them will help you out with fancy stuff like tax-loss harvesting for your non-TFSA/RRSP accounts or getting exposure to semi-exotic asset classes. Most of them will help you answer simple questions like, “Given my income for the year, am I best off in an RRSP or TFSA?”

For most investors though, (especially young ones with a massive investment window ahead of them) the biggest value might just be the fact they promote a super boring mindset and that they are incredibly easy to use. There is NO temptation to dabble in gold ETFs or decide to “overweight” the Canadian part of your portfolio because you think that it’s “due for a rally” – because the platform won’t allow you to do so!

Easy and Average – Your Best Bet

The combination of being incredibly easy to use and guaranteed market-average returns (the ETFs that robo advisors like Wealthsimple use, just track broad market indexes like the S&P 500 or TSX 60) are doing a great job of eliminating the execution gap for my readers.

Can you shave off .35-.5% MER by opening up a discount brokerage account, selecting your own index ETFs, and then going in and rebalancing the portfolio every 1-3 months? Absolutely. In fact, in the spirit of full disclosure, that’s still how Robb and I both invest.

The thing is that, from what I can tell, when it comes to investing most people don’t want to be taught how to fish. They want the fish caught for them, cleaned for them, and cooked for them! There is nothing wrong with being willing to pay a reasonable fee for deliciously prepared fish arriving on your plate – and not needing to know every step in how it got there.

Canada’s robo advisors are simply the best way to make sure that your fish will be quite tasty, that it doesn’t cost a mint, that it’s incredibly easy to order (you won’t even have to think about it and definitely won’t have to do any rebalancing math), and that if you want to know the process by which that fish got to your investment plate – it’s an open and transparent model.