Guest Blog: How to pick a robo-adviser

1. Open up a self-directed brokerage account and invest directly in stocks, bonds, ETFs or mutual funds.
2. Go to the bank or invite that mutual fund/insurance salesperson you met while you were dropping your kids off at school over to your house, who will sell you mutual or segregated funds that cost in excess of 2% per year and pay her a commission based on the kind of funds they are and how expensive they are for you to own.
3. Find a fee-only investment manager close enough to you to do business with, provided you have enough money (somewhere in the $500,000 to $1,000,000 range), and feel that paying 1-1.5% annually on that money is worth the management and financial planning advice you’ll get.

I unequivocally believe that — provided you have the relatively small amount of time necessary to set it up and maintain it and the relatively large amount of intestinal fortitude to stick with your plan no matter what the markets are doing — a self-directed, simple Couch Potato portfolio of low-cost, index ETFs is the best investment strategy for most Canadians.

A reasonably intelligent person should be able to follow an able guide like John Robertson’s soon-to-be-released The Value of Simple and do just fine, sometimes in combination with the service of an advice-only planner like me or most of the people on this list from MoneySense Magazine, or possibly by paying for the DIY Investor Service offered by PWL Capital to get set up.

I want to be really, really clear about costs here: the lower you can get your annual investing costs, the better off you’ll be. This can’t be overstated. Seemingly small amounts add up over a lifetime of investing to very large amounts of your savings (see this post from Michael James on Money for a good set of charts). However, the question shouldn’t be “what’s the lowest cost?,” it should be “what’s the lowest cost that I will stick with?”

I also want to be clear that “investment management” and “financial planning” are not the same thing: financial planning is the context, the “what do I want my money to do for me,” and investment management is the tool, the “and this is how my money is going to do it.” It’s one of many tools, and (often) not the most important one. (End of Really Important Sidebar) 

Online Investment Option Calculator

If you’re seriously looking at what the online advisors are offering (and you should be), I’d invite you to use the Canadian Online Investment Option Calculator** as a starting point to calculate the relative cost of each service. With that information, you can compare the different services based on where you fall on the “how much money do you have?” spectrum. That’s the objective part of the choice.

The subjective part of the choice (although each provider would probably argue it’s not subjective at all) is all the rest of the information you should spend some time gathering, preferably by calling each provider available in your province or territory, telling them where you fall on the “needs little advice” to “needs lots of advice” spectrum, and simply asking:

• how the portfolios are constructed
• how often they’re rebalanced
• what institution is the custodian for your money
• whether financial planning is included in the fee, if it’s purely investment management, or if all you’re paying for is access to the model portfolio with no other advice
• whether your money is managed across accounts as a single portfolio or whether each account is managed separately
• how simple it is to give them your money and get on with your life, and how simple and jargon-free the statements, online dashboard, and any ongoing communications are
• how often you’re able to talk to someone if you need to get persuaded off the ledge while the markets go crazy
• how well-developed their retirement income and decumulation strategies are

If you’re investing at the bank or with a salesperson that comes to your door, and have decided against investing on your own, write this down on a piece of paper right now:

“I will give myself until (date — no more than a month from now) to investigate the different online invesment options, and then I will decide on one and start the transfer process”

“I will give myself until (date – no more than a month from now) to investigate the different online investment options, compare the service they offer to the service I’m actually getting from my asset manager, and then I will decide whether to continue with my asset manager, negotiate a lower fee, or start the transfer process”

—

*Not to be confused with their build your own portfolio service, which – for the purposes of this comparison – isn’t a contender.

**I have to thank John Robertson, blogger behind holypotato.net and author of The Value of Simple for his invaluable assistance with the vagaries of conditional formatting and =if formulas, as well as Randy Cass of NestWealth, Tea Nicola of WealthBar, Michael Katchen of Wealthsimple, Bruce Seago of ShareOwner, and David Toyne of Steadyhand for their remarkably candid responses to my very wordy emails and many, many questions. Any errors in either the calculator or the information are purely mine.