It’s rare in this beat to find something really new. But as fee-only financial planner Sandi Martin recently wrote in her blog, the advent of a new breed of online investment services known as robo-advisers is “news regular investors pursuing findependence should be paying attention to.”
Robo-advisers use online portfolio management tools to assemble low-cost portfolios of exchange-traded funds (ETFs) for retail investors who don’t want to do their own asset allocation and rebalancing. The great part is they do this for a fee of just 0.5% above and beyond the low fees embedded in the underlying ETFs.
Much has been written about these new “light advice” providers in the past year. But rather than reprise them, I opted to talk to their customers instead.
I expected their clients would come from three places. First would be price-conscious investors moving down from high-priced mutual funds or wrap accounts. Second would be already cost-conscious users of discount brokerages and ETFs who realized their own limitations as investors. The third, I thought, might be “new money” coming from inheritances, insurance settlements, lotteries or other windfalls.
It turns out that most come from the first camp. Typical is 27-year-old Ryan Freeman, who uses Toronto-based Wealth Simple Financial Inc. Since leaving business school he’s managed his own money through the online discount brokerages offered by the banks. “I’ve got to the point in my career where I no longer have the time, and I’m not comfortable investing without dedicating the time to mitigate my risk through proper research and due diligence,” he says. Nor does he consider the service “robotic” in any way. “I’ve had far more human interaction than I did with the more traditional online platforms. The term is pretty misrepresentative.”
‘For me, the real value is in hiring someone to do it all for me, so I don’t have to worry’
One customer of NestWealth.com we’ll call Ken doesn’t think much of the term robo-adviser, either. “The concept here is about asset allocation and stripping away bad investing behaviour. This serves an underserved market.” Those with $1 million can go to investment counsellors but “if you don’t have $200,000 to put all in one place, the banks won’t touch you. You either go to an independent or do it yourself.”
Ken did cite one case of “new money” moving to robo-advisers, at least hypothetically. “I wish I’d known about this when my grandparents passed away. I didn’t want to manage their nest egg and a robo-adviser makes sense for older people not conversant with markets.”
A NestWealth client from Port Dover, Ont., Ryan Duffy, moved over from a traditional brokerage firm that sold him mostly mutual funds “due to my own ignorance.” Eventually, he says, “I came to realize how expensive they are compared to ETFs.” He also wanted a firm to deal with such minutiae as rebalancing. “I don’t want to do that. I don’t love this stuff. I love the idea of retiring some day, which is why I’m doing this. I send them money every month and they take care of it.”
Duffy tried the online do-it-yourself route in 2005, “thinking I could outsmart the market, but I didn’t do well. I like my investing very simple and I don’t want to give lots of thought to it. I just want to know my investments will be there in 20 years and I don’t have to do much work.”
Duncan Blair, 31, recently signed up with Vancouver-based WealthBar.com. He emigrated from New Zealand three years ago, but had never bought a stock, mutual fund or ETF. He was a procrastinator and left his money in high-interest savings accounts for years. “For me, the real value is someone taking it and doing it all for me relatively painlessly so I don’t have to worry.”
Another WealthBar client, Crystal Hendrickson, got tired of paying high fees and redemption charges at a well-known Winnipeg-based mutual fund company. In her early 30s, she prefers to take her risks as an entrepreneur rather than with her investments. “The reason I like WealthBar is the financial planning. With the planning tool, you can plug in everything you own and save and show your horizons. I’m set now to retire at 65.”
Another client of the firm, 29-year-old Nik Pinski, is a software developer who says “I should have been saving a long time ago.” He finds investing “tedious and difficult” but knows leaving his money in cash “won’t even keep up with inflation.” Pinski is the closest I found to someone who “fired himself” as a DIY investor. He made a little money in a Questrade account after 2008 but wasn’t consistent. It’s like “I interviewed myself and decided to go in a different direction.”
In every case, these users were satisfied with the combination of price and value. For them, the rock-bottom costs of being a total DIYer weren’t worth the loss of peace of mind. I agree: robo-advisers are the real deal, giving investors peace of mind at a reasonable cost. I envy younger investors with a blank slate in front of them. They’ll be able to save themselves a lot of losses and heartache with these services.