By Edward Kholodenko, Questrade
Special to the Financial Independence Hub
Uber has quickly become the largest personal transportation company in the world, yet it doesn’t own a single vehicle. That’s because there’s more to Uber than just hailing a ride from your phone. It’s providing more convenience at a lower price and in turn, transforming the transportation industry.
Substitute Uber for Amazon, Airbnb, or any other tech disruptor and a common theme emerges. On the road to becoming mainstream, applications that reduce cost and improve convenience are often first adopted by millennials and the tech-savvy. While the early adopters reap the many benefits of these innovations, those who hesitate are missing out.
Retirement challenge and the Robo-Revolution
When it comes to financial technology, there are certain populations that can no longer afford to be late adopters. Thanks to the innovation in the investment space, preparing for retirement has become easier than ever. Enter robo-advisors: an online wealth management service that provides diversified investing, much like a mutual fund, but at a much lower cost.
Given the current state of retirement savings in Canada, it’s apparent that this technology has great value to those willing to take the leap.
There is concern that 80 per cent of middle-income Canadians nearing retirement won’t have enough to support themselves. The average Canadian’s retirement savings of $71,000 will last only a few years, and, 50 per cent of Canadians are not confident they will have enough to retire comfortably.
Not only are Canadians saving far too little for their retirement, but also many can no longer depend on company pension plans to provide the income needed to stop working. Our golden years are increasingly self-funded and investment decisions now fall on the shoulders of the individual. There’s a fantastic opportunity for new solutions in this space, and those willing to embrace a solution provided by fintech providers are reaping the reward.
Robo-advisors, in spite of the name, aren’t actually robots. Professional (human) portfolio managers handle all of the investments. In fact, there are two types of managed robo-advisor accounts: actively- and passively-managed:
Actively-managed advisors have a dedicated team of portfolio managers who select investments and adjust the portfolio to take advantage of market opportunities, all of this at a low cost. Passively-managed advisors typically invest according to set investment rules that only track the market.
These advisors use leading technology and proven strategies to provide a better investment experience at a lower cost to the consumer. And, by reinvesting the money you save in fees, individuals are able to increase their retirement savings and returns.
Robo-advisors are helping Canadians retire wealthier
The way we invest may be changing but the fundamentals of successful investing have not. Robo-advisors were created with these fundamentals in mind:
- Invest early and regularly to achieve your goals
No matter where you are in your retirement journey, it is important to identify what you require for a comfortable retirement, and what to contribute to get there. Robo-advisors are set up to help you envision what is required to achieve your financial goals.
Most robo-advisors provide a user-friendly questionnaire that helps paint a picture of your current financial story, financial aspirations, and appetite for risk. An algorithm identifies your best investment portfolio by matching it with your financial goals. Graphs are then used to help envision how your investments will grow over time.
Questionnaires are typically offered online for convenience but you can also speak with a portfolio manager on the phone or in person.
- Diversify your investments to minimize risk
No one wants to spend their life saving for retirement, only to lose everything in one fell market swoop. We see this hesitation in Canadians’ portfolios, 60 per cent of which sit in cash. Cash feels safe, but with today’s low interest rates and the constant nibbling of inflation, you cannot count on cash to grow your savings. Diversification is still key to smart investing.
Robo-advisors build a diversified portfolio of exchange-traded funds (ETFs). ETFs are a low-cost version of mutual funds that trade like a stock. In one ETF, you can own hundreds, sometimes thousands of different assets. Spreading risk across many different assets means gains in some will mitigate losses in others.
- Reduce your fees to increase your savings and returns
Consider this: Would you rather have $1 million now or a penny doubled every day of the month for 30 days? If you took the $1 million you’re in the majority, and if you took the penny you probably knew it was a trick question. But it’s not a trick: it’s a lesson in compound growth. If you took the penny doubled every day of the month for 30 days you would have over $5.3 million.
Robo-advisors maximize the power of compounding by charging the lowest fees of managed investment services. Lower fees means higher savings and returns for you as the investor. In fact, when you compare investing in mutual funds vs. the low-cost ETF portfolios, offered by robo-advisors, you’ll see an increase in retirement savings, often by as much as 30%.
So, how do they do it? Robo-advisors can offer these lower fees for two reasons:
- They invest using cost-efficient ETFs, which offer diversification at the lowest possible price.
- They operate online, resulting in lower operational expenses and overhead, which they are be able to pass along to clients.
It’s never too late to adopt!
Just as Uber and other disruptors have transformed their industries, robo-advisors will continue to reshape the wealth management industry as well. In the United States alone, an estimated $2 trillion will be under robo-advisor management by 2020.
Whether you are a just starting to invest or nearing retirement, your retirement need not be a worry. It’s never too late to adopt a new technology, just as it’s never too late to start investing in a more financially-secure retirement.
Edward Kholodenko is President & CEO of Questrade Financial Group, an independent multi-service financial group that delivers unparalleled value to its clients. For the past 17 years, Questrade has been an innovator in the providing new lower-cost financial solutions through technology including Questrade Self-Directed online investing and Questrade Portfolio IQ, an actively managed robo advisor service. With over $5 billion in assets and 30,000 new accounts opened for Canadians each year, Questrade has been ranked Fastest Growing Online Brokerage by Investor Economics and has been chosen as one of Canada’s Best Managed Companies for the last five years in a row.