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Robo-Advisor Battle Royale

The investment landscape changed this year when a new online investment model came to Canada.  Already established for years in the United States with firms like WealthFront and LearnVest – robo-advisors have made their way north of the border with hopes to disrupt the current advice model.

What exactly is a robo-advisor?  Essentially it is an online service that gives investors a choice of model portfolios that are built with low cost exchange-traded funds and regularly monitored and re-balanced for you.  Think couch potato portfolio with a side of light advice.

Related: More ways the investment industry is screwing Canadians

All of this is offered for well below the cost of a bank mutual fund, which in Canada average as much as 2.42% for equity funds.  Robo-advisors, on the other hand, charge roughly 0.50% to manage your account, plus whatever fees are associated with your ETFs – typically between 0.05% and 0.60%.

The robo-advisor firms that we’ll look at today include ShareOwner, Nest Wealth, WealthSimple.  These firms are up-and-running now, although some in select provinces only.  WealthBar and Smart Money Capital Management look like they’re ready to start accepting clients soon. For more up-to-date information check out Young & Thrifty’s complete guide to Canada’s robo-advisors.

Nest Wealth

Clients at Nest Wealth each get a customized portfolio based on their current financial situation, goals and risk tolerance.

Pricing – Nest Wealth charges a flat $80 monthly advisory fee.  Clients under 40 will pay $40 per month.  The only other fees you incur are the costs of trading and holding the ETFs you will own.  The ETFs in your customized portfolio average 0.18%, and when your account is rebalanced you’ll pay $9.99 per trade.

Model portfolios – Nest Wealth uses a combination of large low-cost broad ETFs from the largest ETF providers in Canada (iShares, Vanguard) to construct your portfolio.

Each ETF in your portfolio represents an asset class.  The broad asset classes you will hold amongst seven ETFs are: equities, fixed income, and real estate.

Re-balancing – Nest Wealth will rebalance “as often as it’s needed and not any more often, but at least once a year.”  They’ll continuously monitor your portfolio and periodically rebalance it back to your target mix, but are not able to predict when or how often they are likely to rebalance because that depends on the performance of each of the asset classes.

Other fees and account minimums – The account minimum for investors under 40 is $25,000.  For investors over 40, the account minimum is $50,000.  Nest Wealth currently supports taxable investment accounts including individual, joint and trust accounts, as well as most types of registered accounts including RRSPs.

Availability – Nest Wealth is available to investors across Canada. Get your first 3 months managed free!

WealthSimple

When you open an account with WealthSimple, they’ll guide you through the entire process: from assessing your risk tolerance and determining your investment goals, to setting up regular monthly contributions.  After a conversation with your dedicated “Wealth Concierge”, they’ll build you a customized portfolio and start investing for you.

Pricing – WealthSimple charges 0.50% for accounts under $250,000, 0.40% for accounts between $250,000 and $1,000,000, and 0.35% for accounts over $1,000,000.  There are no trading commissions or administration fees.  The only other fees you pay are for investment products, which average 0.25% per year, and currency conversion.

Model portfolios – WealthSimple works with you to assess your risk tolerance and financial goals.  Through a combination of a questionnaire and a conversation with your Wealth Concierge, they will match you to a portfolio that meets your long-term investing needs.

ETFs are carefully selected from several different companies including Vanguard, iShares, BMO, Purpose, and others.

Related: Invest like a billionaire? No thanks!

A wide array of asset classes includes cash, Canadian investment grade bonds, U.S. high yield bonds, real estate, Canadian stocks, U.S. stocks, foreign stocks, emerging markets, dividend stocks, and risk managed stocks.

Re-balancing – If an asset class drifts more than 5% from your target position, WealthSimple will reset your asset mix to keep your portfolio balanced.  By selling some of your investments that are up and buying some that are down, you’ll smooth the impact of market movements.

Other fees and account minimums – WealthSimple’s management fee covers transactions, rebalancing, advice, and account administration.  Their account minimum is $5,000.  They support all major taxable and registered investment accounts including: individual and joint taxable, TFSAs, RRSPs, and LIRAs.

Availability – WealthSimple is open to investors across Canada. Get your first $10,000 managed free!

WealthBar

This firm describes itself as “Canada’s only full-service online wealth manager.”  At WealthBar, an expert financial analyst actively monitors and adjusts your portfolio.

Pricing – WealthBar offers an all inclusive management fee based on the following tiers:

  • Up to $5,000 – Free
  • $5,000 – $150,000 – 0.60%
  • $150,000 – $500,000 – 0.40%
  • Over $500,000 – 0.35%

The management fee covers automatic rebalancing, insurance needs analysis, discounts on other financial services, and all trading fees.

Managed investment accounts – WealthBar’s website says that access to its managed investment accounts will be available “very soon”.

*Update – Shortly after entering my email address I got a notification that I was “ready to invest”.  Here’s a brief overview.

A series of risk-related questions will lead you to a recommended portfolio of ETFs.  There are five model portfolios ranging from safety to long-term growth.  Average MER is between 0.40% and 0.48%.

Products – The firm uses iShares equity ETFs, Vanguard and Horizon fixed income products, and BMO for REITs, corporate bonds, and currency hedging.  All five portfolios use the same funds with different weightings.

  • iShares S&P/TSX Equity Income
  • iShares MSCI EAFE IMI
  • iShares Gold Bullion
  • iShares S&P500
  • Vanguard Canadian Short-Term Corp. Bond
  • Horizons Active Floating Rate Bond
  • BMO Equal Weight REITs
  • BMO High Yield US Corporate Bond Hedged to CAD
  • BMO Covered Call DJIA Hedged to CAD

Availability – WealthBar is registered as a Portfolio Manager in Alberta, British Columbia and Ontario.  Investors will have to open an account directly with Virtual Brokers – WealthBar’s “custodian”.

Smart Money Investments

With Smart Money, investors will get an optimized global portfolio of equity and bond ETFs that are regularly rebalanced.  Investors will always have someone to talk to about your money, and you’ll pay a low fee of 0.45% annually.

Smart Money is registered with the Ontario Securities Commission as a Portfolio Manager.  The Toronto-based company is launching soon.

Who benefits?

Call it a robo-advisor, or a light advice model.  The fact is, these online investment services have found a niche that helps the do-it-yourself investor overcome their bad behaviour by automating processes like fund selection and rebalancing.  In most cases, an actual human advisor is there to guide you along the way.

While true DIY investors may scoff at paying a management fee for building a simple portfolio of ETFs and rebalancing them once a year, many Canadians would stand to benefit from an online, light advice model.

Not only are the fees just a fraction of what the majority of Canadian investors pay for mutual funds, but investors can avoid the inherent conflict of interest that comes from dealing with their bank “advisor” or salesperson.

Related: Why a ban on embedded commissions is coming, despite industry objection

Anyone who has ever asked their bank advisor about index funds and ETFs were surely met with objections and obstacles as to why they should stay in high priced actively managed mutual funds.

Finally, someone who uses a fee-only advisor but who isn’t comfortable investing on his or her own should consider a robo-advisor.

Final thoughts

This tale of the tape isn’t much of a contest at the moment.  The experience, pricing, and simplicity of its model portfolio structure puts ShareOwner ahead of the competition today.  An added bonus is that its services are available to anyone in Canada, rather than just in select provinces.

WealthSimple offers the most sophisticated model, complete with Wealth Concierge and value-added services like tax-lost harvesting for larger accounts.  The fee structure is also very competitive, but the large number of investments and asset classes available seem to contradict its “simple” objective.

Related: Why investors should embrace simple solutions

Kudos to Nest Wealth for offering a discounted pricing option for investors under 40, however the large account minimums and additional trading fees make them best suited for more affluent investors, as the service scales up well – becoming more cost effective as your assets grow.

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15 Comments

  1. Stephen @ HowToSaveMoney.ca on October 6, 2014 at 6:17 am

    This is a really interesting concept. Index investing is already pretty simple, but I like how this makes it dead simple so that you don’t ever have to think of it, much like a mutual fund, at a lower price. In addition you get some light advice thrown in.

    It could definitely make sense for a lot of investors. Thanks for the thorough breakdown of what’s available to Canadians today!

    • Echo on October 6, 2014 at 10:44 am

      Thanks Stephen. More low cost, simple solutions are what’s needed for investors today.

  2. Paul N on October 6, 2014 at 9:27 am

    Nicely done!

    It’s nice to see an impartial detailed review like this. Thanks for taking the time to do that. For people with busy lives “making money” sometimes this is the best way to deploy it without getting hosed with fees…

    • Echo on October 6, 2014 at 10:47 am

      Hi Paul, thanks for the kind words. I know a dentist who does very well but he admits he has no time to manage his investments and so he’s turned it over to an advisor friend that he went to University with years ago. He actually told me, “I know he’s selling me the most expensive products to line his own pockets, but I just don’t have time to deal with it.” This service would be great for him. Set it up, fund it regularly, and forget about it.

  3. Bernie on October 6, 2014 at 10:28 am

    Interesting concept Robb & well put together but all the above choices involves funds. Would you know if there are companies like “motif.com” coming to Canada? Motif helps individuals custom build, tailor & buy their own ETF-like basket of up to 30 stocks for a total $9.95 commission. This type of service could be for those who prefer selecting stocks to ETFs but are handicapped by initial funds to set up their own portfolio.

    • Echo on October 6, 2014 at 10:40 am

      Hi Bernie, ShareOwner lets you bulk purchase stocks but the fees are quite high. I’ve heard that CEO Bruce Seago hopes to lower those fees across the board soon. I agree that could be a decent option for first-time investors who are looking to build a dividend stock portfolio.

      https://www.shareowner.com/advantage.html

  4. Dale on October 6, 2014 at 4:13 pm

    Hope this isn’t just a variation of the risky “here’s my money, make me rich” approach, which can lead to reasonable returns or disaster…

  5. karly on October 6, 2014 at 6:20 pm

    Super helpful article. Thank you!!

  6. Dan @ Our Big Fat Wallet on October 6, 2014 at 6:27 pm

    Interesting how the industry is slowly starting to evolve and offer more low cost choices. I noticed the growth portfolio of share wealth has a 10 year return of 8.8% which actually isn’t too bad. It would definitely take the emotion out of investing and allow people to ‘set it and forget it’

  7. Sandi on October 7, 2014 at 7:38 am

    I disagree with your cost assessment of NestWealth vs. ShareOwner. NestWealth is more expensive for clients with less money to invest, agreed, but once balances start to creep up the cost difference is small enough that to call it the “most costly and least investor friendly” is overstating the case. The tilt happens at aroung $450-500K, at which point NestWealth is the clear winner based on cost alone. (I’ve – of course – made a spreadsheet to show the difference in total cost depending on the assumed assets under management and number of trades per year): https://docs.google.com/spreadsheets/d/14wMiTNkRxlwzaqwUYLgjQSyfGU4hfEbop6cpNCF0tTo/edit?usp=sharing

    • Echo on October 7, 2014 at 9:32 am

      Hi Sandi, thank you for the spreadsheet. Good to know when the cost-benefit starts to favour Nest Wealth.

  8. Paul N on October 7, 2014 at 10:32 am

    @ Dale – You made a very general statement. What would you say is your “non risky” approach? For example : giving your money to Investors group, or a bank or a greedy advisor? (Where the model is what makes more commission for the institution vs. what model allows you to keep more of your gains and reinvest them). Or index investing?

    @Sandi – Most clients can only reach $450,000.00 over a lifetime of contributing… So that savings only kicks in there. Also when you are getting to large sums like that, it opens a lot of opportunities to you, some good some bad. Good to re-access your overall plan when you have that much invested. In any scenario a client needs to be careful of all their choices, many wolves waiting to take a pc.

  9. Dale on October 7, 2014 at 2:02 pm

    @Paul N
    Investors who have no time or interest in understanding their investments have their expectations and sometimes their lives shattered. We see these anecdotes in the news regularly.

    No one knows the future. These ‘robo’ firms are run by people and are subject to human error over time, the same as any other organization. Time will tell…

  10. Chris Nicola on October 8, 2014 at 1:19 pm

    Really appreciate you guys taking the time to review WealthBar. I wanted to add that technically we are open, at least for B.C., Alberta and Ontario, and the waiting list is largely a formality help us ensure consistent service times on account opening. At the moment we are able to allow people to start opening their accounts almost immediately.

    Also, we do offer more than just “light” advice. Our aim is to provide a complete financial planning experience online. This includes a professional review by our advisors that helps with optimizing the use of TFSAs, RRSPs and other tax advantaged strategies and advising on how much one should be saving to meet their retirement and other goals.

    I should probably also mention that we are life licensed and, as an independent insurance advisor (we don’t work directly for any insurance supplier) we can offer access to insurance products across multiple carriers.

    We’d be happy to answer any follow-up questions you have.

  11. My Own Advisor on October 10, 2014 at 1:19 pm

    Nice post!

    Great to see this level-of-detail amongst the players.

    I had an interview with Michael Katchen recently (WealthSimple), stay tuned for that post soon Robb.

    Any designs on using the services yourself?
    Mark

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