Robo-advisor or financial advisor, the challenge

Updated April 2017

Everything you need to know about robo advisers

Robo-advising is making it easier and cheaper for people to invest their money.  Since an algorithm chooses and rotates ETFs and/or funds based on the clients risk tolerance level, the cost is reduced.

Every financial institution should have robo-advising available for their clients.  Therefore, it is an option you can consider.

IShares has an online sample porfolio building website.  The screenshot above is the defensive portfolio with the majority of the capital invested in short-term, low risk bonds.

26% is invested in stocks which can be considered the high risk, high return portion.  XIC (Canada) and XAW (World) exposes your portfolio to stocks all over the world.

You will notice that iShares provides a breakdown of how much money is paid out if you used an advisor or bought a mutual fund.  The money paid out are rough estimates since the MER and/or advisor fee vary with every mutual fund.

The screenshot above is an aggressive portfolio with 100% invested in stocks all over the world.  You will notice that the return over a 10 year period is lower than the defensive model portfolio.  The reason is that, in general, the MER to invest in bonds is lower than stocks.  Therefore, a hypothetical 5% return over 10 years for both a defensive and aggressive gives you a better idea how the MER differs.

IShares portfolio builder is just a sample of all the ETFs iShares has.  It is shown here for illustrative purposes to explain the risks and fees.  Every ETF provider has many ETFs to choose from.  Therefore, you can tailor your portfolio based on your needs.

For those who want professional financial advice, see your advisor.  I am a DIY investor who understands and accepts the risk of investing without a qualified advisor.

DIY Portfolio Builder by Blackrock

Feb 2015

Being one who buys ETFs and stocks from a discount broker, I am quite familiar with the ins and outs of ETFs.  Therefore, I can see how robo-advisors can work, but I can also see limitations with them.

When it comes to ETFs, there are the usual index trackers, but there are also other types that mimic mutual funds.

ETFs are available that are open-ended (US only as of Feb 5, 2014) and/or actively managed by a fund manager.  Therefore, there are many ETFs that can be linked to a mutual fund.  The ETF landscape in Canada is fairly complex with the emergence of ETFs that no longer track a specific index.

Robo-advisors can be useful to pick the ETFs that will fit a client’s risk tolerance, but a human advisor will be needed for the purpose of understanding other ETFs that do not fit into a client’s portfolio.  For example, I have looked into actively managed ETFs that implement a seasonal rotation strategy.  I have also looked into ETFs that target a specific sector.

Robo-advisors may have limitations since it may not be able to work outside the basic ETFs to fit into a clients risk tolerance level.

When I buy ETFs, I look at what are the holdings within the ETF, how easy it is to buy and sell the ETF, what is the purpose of the ETF, and any other information provided.  ETFs have grown from the typical index trackers and now need the expertise of human financial advisors who can look into an ETF and determine if it will fit a client’s current portfolio.

Human financial advisors will not be replaced, but will fill a specialized void where robo-advisors cannot help.  In this case, buying ETFs that are narrowly focused.

After all, if 15 ETFs can fill a specific risk level, how will the robo-advisor divide the money?  Will the robo-advisor buy all 15 ETFs equally, buy one ETF, or use some other allocation.

People often ask, why have an actively-managed fund?

If you know someone, we will call her Sarah, who is so good that she can make a 10%/year return on average over a number of years, you will most likely ask Sarah to invest your money.  Sarah, being the smart cookie she is, will instead create “Sarah’s Growth ETF” and charge a 2% fee to manage their money.

Therefore, the manager inside the fund is doing the best he/she can to make his/her clients money grow.  These managers can be self-taught traders and/or well educated traders using whatever financial tools are available to pick the winners from the losers.  The stock picking method used can be universal and/or proprietary.  Therefore, you will have to place your trust and money in the fund manager.

Bill Gross, the Bond King who often beats the bond index, has his own fund with a minimum investment of $1 million dollars, and Warren Buffet, a famous value investor, has his own publicly traded investment company that can be bought and sold on the open market.  They will most likely never tell you how to pick the winners from the losers since they are profiting from their knowledge.

The one thing that must be remembered when buying securities is to never get lazy.  Check on your investments periodically since the rise of the price and/or the payouts can be artificial.  There are ways to make a company look good by using unscrupulous methods.

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