When it comes to investments and financial planning, Canadians have more choices than ever. However, many are stuck trying to decide whether they should go with a traditional financial advisor, or use an online robo advisor to invest their money. Deciding on which one is best for you depends on your needs, and for many, the answer might actually be both options.
Financial Advisor vs. Robo Advisor
Here’s a quick summary of how a robo advisor and financial advisor compare:
|Robo Advisor||Financial Advisor|
|Minimum Investment||As little as $100||$50,000+|
|Fees||0.20% to 0.75%||1% to 3% or more|
|Services||Investing; some offer financial planning and other free perks||Investing, budgeting, tax planning, retirement planning, insurance|
|Investments||ETFs||ETFs, stocks, bonds, mutual funds, real estate, other investments|
Contrary to how the name might sound, using a robo advisor doesn’t mean you’re investing with the Terminator. Let’s break it down!
What is a robo advisor?
A robo advisor is an automated service that invests in the stock market on your behalf. All you need to do is open an account and they’ll take care of the rest. Despite the name “robo,” this tool is not actually a robot. There are real people behind the platform making decisions about how to allocate and invest your money. However, most of the trading is done on autopilot through a computer algorithm. Robo advisors invest primarily in portfolios made up of low-cost ETFs.
Why use robo advisors?
Robo advisors are an easy and accessible way to get started investing in the stock market, even if you don’t know much about buying stocks or don’t have a lot of cash to invest. Because they offer an automated service, they can keep costs exceptionally low. These savings are passed on to clients. Most robo advisors charge only 0.20% to 0.60% of your total portfolio value in management fees – a fraction of what you would pay for a dedicated financial advisor.
What is the best robo advisor in Canada?
It depends! There are many excellent robo advisors in Canada, and for clients with bigger portfolios, some robo advisors offer additional free services like retirement planning. For instance, Wealthsimple Black is a premium service for those with over $100,000 in net deposits across their Wealthsimple accounts. As a Wealthsimple Black client, your management fee will be lower at 0.40%, plus access investments in more tax-efficient funds, and have available a money coach to provide a more holistic approach to your entire financial picture.
Should I use a robo advisor?
A robo advisor is an ideal choice for new investors who don’t have a lot of capital to get started, or for those who do not want the hassle of managing their own investment portfolio. However, it’s important to note that investing in the stock market is only one piece of managing your money and you might need a financial advisor to help with other aspects of your financial life.
Robo Advisor Pros and Cons
When it comes to deciding whether investing with a robo advisor is best for you, there are some pros and cons to consider.
Robo advisor pros
- With a robo advisor like Wealthsimple, you can start investing with no minimum required
- No understanding of the stock market is required.
- Low cost: you’ll pay a fraction of what a financial advisor charges.
- “Set it and forget it” – no management or active trading required!
- Some robo advisors offer a welcome offer. Get a $100 bonus when you open and fund your first Wealthsimple Invest account (min. $1,000 initial deposit)!
- No individualized plans or portfolios.
- No customization of the portfolio selected for you.
- Services are limited exclusively to investing, except for high net-worth clients.
Your parents probably had a financial advisor, but is it for you? Let’s take a look.
What is a financial advisor?
A financial advisor is a certified financial professional who can help you with every aspect of managing your money, from creating a budget to investing in the stock market to estate planning. They will connect with you one-on-one to establish a personalized financial plan catering to your individual situation and goals.
What does a financial advisor do?
Financial advisors do more than invest your money for you. They’ll tackle every aspect of your financial life from calculating how much you need for an emergency fund to assist you by creating a plan for how to pass down wealth to your children. They’ll also identify vulnerabilities in your financial situation, like inadequate insurance coverage or opportunities to save on taxes.
Furthermore, when it comes to investing, a financial advisor will offer you more than a portfolio of index funds as a robo advisor does. They’ll be able to suggest common stocks, real estate, and other alternative investments like private equity to further diversify your portfolio and increase your returns. However, these extra services may come at an extra cost.
How much does a financial advisor cost?
Financial advisors will be either “flat fee” or “fee-only” financial advisors and charge either a set hourly rate, or they will be “commission” financial advisors and charge a percentage of your total assets. Expect to spend $250 to $400 per hour for a flat-fee advisor, or 1% to 3% of your portfolio value for an advisor who charges a percentage commission.
As you can probably guess from these figures, financial advisors prefer to work with high net-worth clients. Many require clients to have at least $50,000 in assets, but some will require $100,000 or over $500,000 to access their financial services. Justifying using a financial advisor depends on how much help and guidance you want with your finances, as well as how much money you have to manage.
Should I get a financial advisor?
Financial advisors offer a human approach and a one-on-one experience that many people like when it comes to money matters. It’s extremely valuable to have someone on call to answer questions who already knows your financial situation.
But finding a financial advisor that understands you and your needs can take time. It’s like dating! Make sure to interview at least five financial advisors to ensure they listen to and comprehend your needs, plus have a personality that fits with yours. After all, they will be managing a very important aspect of your life for years and choosing wrong just means a break-up down the road.
Financial Advisor Pros and Cons
If you’re trying to decide if you need a financial advisor, here are some aspects to consider.
Financial advisor pros
- Provide individualized financial plans.
- Offer additional services like budgeting, life insurance, tax and estate planning.
- Provide more investment opportunities like stocks, bonds, real estate, and more.
Financial advisor cons
- Typically do not work with clients with less than $50,000 in assets. Some require $100,000 or more.
- Charge significantly more in fees than robo-advisors.
- It can take some time to find a financial advisor that is the right fit for you.
Should I Use a Financial Advisor or Robo Advisor?
Whether you should use a financial advisor or a robo advisor depends on your financial situation. If you’re simply looking for a straightforward way to invest in the stock market, then a robo advisor is all you need. However, if you need more guidance on making a budget, estate planning, and more, then you’re better off with a financial advisor.
Seeing a financial advisor also makes more sense if you have more than $100,000 in investable assets or a more complex financial situation, like being self-employed or a business owner.
But there’s no rule that says you can’t do both! Some people find it beneficial to manage their own investments or use a robo advisor, but meet with a flat-fee financial advisor once or twice per year to ensure they’re on track with the rest of their financial goals. If you’re already investing elsewhere, it’s easy to switch your investments to a robo-advisor. For example, Wealthsimple will cover any transfer fees when you meet the minimum from registered accounts like the TFSA or RRSP, so moving your money is super easy.
Most people will benefit from using both a financial advisor and a robo advisor in their lifetime, but one definitely comes before the other. If you’re just starting out and working to build up your nest egg, a robo advisor is the first step. Once you have more than $100,000 invested in your robo advisor account, you can meet with a financial advisor to look at what’s next for your money. The most important thing is that you explore all your options, and find the solutions that meet your changing needs as your financial assets grow.