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It-s-Your-Life

What's a robo-advisor?

It can only be attributable to human error.

-Hal, 2001: A Space Odyssey

 

For most of us who are within thinking distance of retirement, the term “robo” conjures up images of the B9 Robot on Lost in Space or Robby from the Forbidden Planet. That isn’t to say it’s the only thing that comes to mind but managing your investments and retirement planning isn’t necessarily at the top of the list.

As with all things human, the drive for cheaper, faster and more profitable keeps pushing things forward. Financial services aren’t an exception to this rule. Essentially, “robo-advisors” are online service centres that build custom portfolios, then monitor and rebalance them on an ongoing basis. Rather than deal directly with an in-person advisor, these services can be accessed from your iPad, laptop or cell phone. Typically they create portfolios with exchange traded funds (ETFs) but they are not limited to those securities.

Robo-advisors have a significant presence in the US, where an estimated 15-20 billion US dollars are managed this way, while in Canada we are still at the getting-going stage. Fees for ‘robo-advisors’ fall typically between the cost of a discount brokerage account and that of a full service advisor- somewhere between .50 and 1%. Although the services and fees may vary, this cost usually covers advice, rebalancing, monitoring and trading.

As a rule, planning services haven’t been offered with robo-advisors. The decision on where and how your money will be invested is typically based on a questionnaire that uses algorithms to determine a suitable portfolio for you based on your age, financial situation and risk tolerance. As this form of advice matures so will the services that are available. Some offers provide financial plans and as the industry progresses, we will likely see tools designed to help evaluate and advise the softer side of retirement planning such as health, legacy, vision, social networks and lifestyle. As this is part of the bigger picture when it comes to wealth management some of the firms are being proactive and are already offering these services in conjunction with the ability to engage with human advisors, either in person or on the phone. There are several smaller firms that offer these services in Canada right now, but until major financial institutions take a seat at the table I wouldn’t expect this to become a mainstream option.

The key to their success will be the level of trust that investors are willing to place in the process and form of these services. For those closer in age to the baby boomers and beyond, the comfort level required to commit your life savings to an online service may not be there yet or ever. However, for those who call themselves Gen X, Y or younger this may become a natural extension of their technically driven lifestyle, and may quickly become the way investing is done. As technology and innovation improves, so will the capabilities of these services and the costs. Like all decisions, it comes down to what you are looking for, what you need and what you’re comfortable with.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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