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Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
Contact
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

The Value of Robo-Advice

April 14, 2014 - 1 comment

The growth of algorithm based investing services in the US has raised questions about the future of the professional financial advisor. These automated services provide investors with a high level of convenience in building a sophisticated portfolio at a low cost. Two of the largest providers are Wealthfront and Betterment. Wealthfront charges a .25% advisory fee, while Betterment charges .15-.35%. These fees are charged over and above the fees attached to the ETFs used in portfolio construction, and they cover the cost of advice, transactions, trades, rebalancing, and tax-loss harvesting (on accounts over $100k). Both services have succeeded in automating important processes, but there are elements missing that will not soon be replaced by a machine.

Clarity on your whole financial situation – a human advisor is able to have a meaningful conversation around things like deciding to use an RRSP vs. a TFSA, renting or buying a home, and how much income to take in retirement. If all an advisor/robo-advisor is advising on is optimal portfolio structure, there could be missed opportunities in other areas.

Knowledge of more than just your money – managing a portfolio is one thing, but good financial advice goes beyond tax-loss harvesting and rebalancing. A financial advisor should know your personality, your family situation, your dreams, and your frustrations. This type of relationship ensures that recommendations are in line with all aspects of your life, and it also gives continuity to your finances in the event that something happens to you.

Integration with other professionals – an established advisory practice will have relationships with professionals in adjacent fields. When you are considering something as important as your financial situation, having a team of professionals that trust each other and have experience working together is highly valuable.

Peace of mind – it’s great to have a robust algorithm making sure that your portfolio is being managed efficiently, but that does not mean that your overall financial situation is optimized. The knowledge of an experienced advisor overseeing all aspects of your financial situation is not something that a computer can effectively replace.

For a .15-.35% fee robo-advisors offer great value, and take the DIY investor to a new level of sophistication. When (if) these services do arrive in Canada they could become a tool that firms use to make their portfolio management processes more efficient, but they will not replace the high level work that firms like PWL do for their clients.

By: Ben Felix with 1 comments.
Comments
  15/04/2014 7:51:18 PM
Grant
A nice review. I think you are really saying that computers do asset management best and humans do financial planning best. Some wealth management firms in the US are now contracting out asset management to Robo advisors, and doing financial planning themselves, charging a flat fee eg, one charges $7500 minimum, regardless of the size if the portfolio. This recent article by Jason Zweig talks about this.

http://online.wsj.com/news/articles/SB10001424052702304732804579425210946707526
 



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