There has been a lot of press about these new fangled robo-advisors coming to the market and word is that it will be the preferred asset collector for millennials. So what can these new robo-advisors do that old school advisors or mutual funds can't do? Recently Power Financial invested in one of the robo-advisors providers so it seems that the old guard has an eye to these upstarts and they see that they have potential to take a bite out of their profits or market share. After the Great Recession millennials saw their parents get blown up by the big banks and now associate them with a lot of emotional pain. They now distrust them and new options are being looked at. Is a robo-advisors right for you?
What is a Robo-Advisor?
The "robo" part of the name suggests that a computer will manage your investments for you. The program manages your portfolio through algorithms that will rebalance your portfolio regularly. The positive part of the "robo" part is that it takes the emotions out of investing and therefore can stop the mass exodus of funds when the market is down and then the piling on when the market is at its top. At a higher level robots can also be destructive when algorithms and high-frequency trading go bonkers like when we have "flash crashes". Robot algorithms are becoming a big part of investing and institutional trading now.
What does it invest in?
The robo-advisors ditch active management and high priced mutual funds and use low cost ETFs (Exchange Traded Funds). The algorithms determine if the ETFs that you hold in your portfolio are bought or sold based on their calculations. It aims to always buy what is calculates is going to be the best place to invest at the right time (rebalancing). It'll move your ETFs in real estate, bond, Canadian and U.S. equity, and emerging markets around based on its investing theory to always buy low and sell high. It'll never make bets in one stock or try to take advantages of trends or short term trades. It doesn't sound fun or sexy at all but the robo-advisor group believe it works in the long run.
How much does it cost?
This is the big competitive advantage. Because the robo-advisors buy thier ETFs in bulk they pay very low costs and then pass the savings hopefully on to you. They also charge nothing if you have only up to $5,000 and then the fee is around 0.60 per cent to 0.35 per cent depending on how much money you have. Most of the robo-advisors takes the amount off your account monthly like a Netflix bill versus being taken off from the actual assets quarterly. They will also help with tax harvesting if you have enough money where it makes sense. This is where the robo-advisor sells a losing asset to offset the gains in a winning asset to lower your tax bill in non-registered tax savings accounts like an RRSP.
Are Robo-Advisors Right for Millennials?
If you have less than $5,000 it would be a great way to save for free. Investing in ETFs with the help of a robot or on your own is a great way to get a toe into the market. It could be a great option for the millions of millennials who are interested in "setting it and forgetting" it. More and more millennials go online to get Ubers, pizza, dates, and entertainment -- why not also have your money managed that way too? Here is a list of the big players in the market so far:
Portfolio IQ - www.questrade.com
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