Personal Finance

Automated questionnaires have limitations.
By Gail Bebee | 25/02/16

A handful of small private companies inhabited the robo-advisor space in Canada when BMO Wealth Management launched its SmartFolio portfolio-management service in January. When one of the Big Five banks embraces a new way of delivering advice at a reduced cost, it's time to pay attention.

About the Author
Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com.

A low-cost, low-maintenance investment-management service accessible to many and tailored to individual needs is an attractive value proposition. Yet, online financial advice isn't for everyone. There is much to consider before signing on.

First off, if you have security concerns about conducting your financial affairs over the Internet, an online financial advisor is likely not for you.

Moreover, not every firm is registered to do business in every province and territory. If you live in a less populated jurisdiction, your choice of online advisors is likely to be more limited. Current players in the Canadian robo-advisor space include BMO's SmartFolio, Canadian ShareOwner, Idema Investments, Invisor, ModernAdvisor, Nest Wealth, Questrade's Portfolio IQ, Smart Money Capital Management, WealthBar and Wealthsimple.

Unlike many financial advisory services, account minimums are mostly very low. Although the minimum account size can be as high as $25,000, most online advisors have no minimum.

The financial-planning side of financial advice is not a focus of online financial advisors. It's all about investing money to achieve a goal. Only WealthBar truly addresses the subject. During the enrollment process, new clients have the option to answer some basic financial-planning questions and complete a net-worth statement.

To optimize your personal finances, it is smart to have an overall financial plan in place before you invest. The plan might recommend, for example, that you pay off high-cost debt before starting to save for retirement.

After testing different investor profiles at several online advisory firms, it is apparent that using an automated questionnaire to select a client's investment portfolio has limitations. For instance, retirees looking for income from their registered retirement income funds (RRIFs) are not well served.

Some online questions can be puzzling. At one firm, after signing up and posing as a newbie investor who had never invested in stocks, I was asked online: What would you do with your U.S. stocks if you read that the Chinese market was in crisis?

Given these limitations, look for an online advisory firm that has advisors available to discuss your personal situation before you complete the enrollment process.

When researching an online advisor, check to confirm that the account type(s) you want are available. Not every firm offers every account type. For example, BMO SmartFolio currently doesn't offer registered education savings plans (RESPs) or retirement income funds. Only WealthBar offers registered disability savings plans (RDSPs).

Potential clients should understand how the robo-advisor builds and manages its investment portfolios. What are the methodologies? Which ETFs, or in some cases mutual funds, are used? How does the portfolio suggested for your personal situation compare to the ones that other online advisors recommend? Are there different portfolios for tax-exempt and taxable accounts? How does portfolio rebalancing work?

Some firms have unique offerings which could interest certain investors. Responsible-investing portfolios are an option at ModernAdvisor. WealthBar clients can invest in Nicola Wealth Private Investment Pools, which include private equity, real-estate and mortgage pools not usually accessible to the average retail investor.

The online financial-advice business is new, so the investment portfolios of online advisors do not have actual track records. Hypothetical return data can help you assess the portfolios on offer. Portfolio IQ provides back-tested data for its five model portfolios on its website. ModernAdvisor shows the projected future performance for simulated market conditions ranging from above-average to very poor. If you don't see any return data, ask for it.

An investment plan details the recommended investments, the range of expected returns for the portfolio, the expected volatility and benchmarks to evaluate performance and the rebalancing strategy. A capable investment advisor, online or otherwise, will prepare such a plan for each client. When considering an online advisor, ask to see a sample investment plan.

The management fees charged by online financial advisors typically range from 0.3% to 0.7% of assets under management, depending on the account size. Nest Wealth is unique in eschewing a management fee. Instead, it charges a monthly subscription fee of $20, $40 or $80, depending on account size.

The ownership costs to clients of robo-advice services also include the management expense ratios (MERs) of the ETFs or mutual funds in their portfolios. Some robo-advisors also charge commissions on the trades needed to build or rebalance the portfolio.

The Canadian Investment Fee Calculator is an excellent tool for comparing the total cost of several different online financial advisory services.

The total ownership cost of a robo-advisor service depends on account size and risk level and varies considerably between firms. For a $5,000 growth portfolio, the overall cost could be as low as 0.65% or exceed 2%. With a $100,000 balanced account, the ownership costs -- including the underlying fund MERs -- range from 0.59% to about 1%. No one firm always has the lowest price. It pays to shop around.

Good customer service counts. Is it easy to sign up? Will you get a speedy response to an inquiry? How well will the firm understand your needs? Some firms, such as Wealthsimple and WealthBar, provide each client with an assigned investment advisor. Check out the blogosphere for the experiences of real customers.

If you are able to transfer an existing account from other financial institution, ask the online advisor to pay the transfer fees. If you are transferring more than $25,000, the robo-advisor is likely to reimburse you for the cost. Some firms will accept only cash contributions, so you would need to sell everything before transferring an account.

Online financial advice could be a good fit for investors who want low fees and low maintenance. Its value proposition should hold particular appeal to investors with limited funds, consumers who want to avoid high-priced mutual funds and those who have tried the do-it-yourself route and found it wanting.

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