If the term robo-adviser conjures up images of C-3PO controlling your money, you can relax; robo-advisers aren't really robots. They're simply an innovative way for wealth management firms to leverage technology to create a modern online experience for the benefit of their clients.
"Robo-adviser" is a recent term, used to describe a variety of new and innovative online financial companies. These firms offer lower-cost investment management and advice but being online doesn't mean humans aren't involved, or that you can't talk to one. Many new robo-advisers provide clients with personalized financial advice from a real financial adviser. The term "robo-adviser" may be a bit of a misnomer but it does capture how these firms leverage technology to create a leaner, more efficient business, while also improving the client's experience. This allows these firms to advise clients online and at a distance, at any time or place, reducing the barriers for investment and wealth management. Investing with a robo-adviser doesn't mean sacrificing quality, service or trust, it means more convenience, faster service and, most importantly, lower costs.
Much like online banking, robo-advisers represent an evolution of financial planning and investing. Robo-advisers can be beneficial for everyone; from the first time investor to those nearing retirement. But, if you're not sure if online advice is right for you, here are five factors to consider:
1. Lower fees: One aspect to consider with all financial management solutions are the associated fees. Over long term, fees can add up, costing you more of your overall savings than you might realize. The right online advisers could cost substantially less compared to traditional advisers. If you invest through a bank, you probably pay for advice through a commission embedded in the management fees on your investments. For a balanced fund, the total fees are around 2.5 per cent. If, instead, an independent adviser manages your investments, you may have a fee-based arrangement with them. Fee-based advisers typically charge between one to two per cent for advice on top of the cost of investments, which can be an additional one per cent. In either case - whether through a bank or a fee-based adviser -- you are likely paying more than double what you would to work with an online adviser. In comparison, online firms have management fees that range from 0.35 per cent - 0.60 per cent and investment expenses (MERs) as low as 0.18 per cent.
Online firms can charge less because they've integrated automation into their services. Technology automates mundane back-office processes and frees up advisers to focus on client service. This also reduces overhead costs for things like office space. Of course, your online adviser probably won't take you out for dinner or play golf with you, but they will keep more of your money where it belongs; in your investments.
2. Convenience: Go ahead, stay in your pajamas, have a glass of wine, spend some quality time with your cat. Your online adviser doesn't mind. Part of the draw of online advisers is that clients don't need to meet an adviser in person. This saves you time, is more convenient, and may alleviate some of the anxiety that comes with meeting with a financial adviser for the first time.
The online model suits the modern investor. Whether it's via video chat, email, or even a phone call, investors get the service they want on their terms. You don't have to juggle your schedule and make a trip just to fit in that quarterly meeting with your adviser.
3. Low minimums: Remember when investment advisers only wanted to talk to you if you had loads of money? Robo-advisers' investment advice is available to everyone, regardless of income or net worth. Whether you're making your first $5,000 TFSA investment or you've built up a sizeable nest-egg already, online advisers will provide advice and investment strategies that are appropriate to the stage you are at.
4. As safe as a bank: We often think that banks are the safest place for our money, but this simply isn't true. The CIPF (Canadian Investor Protection Fund) protects investment accounts up to $1,000,000 against the insolvency of any IIROC institution. Your accounts with a registered online adviser have the same protections as any investment account at a major bank or other financial institutions.
5. Access to financial planning tools and services: Depending on the service used, robo-advisers can offer regular investors access to financial tools that have been traditionally reserved for high net worth investors. Services like tax optimization, retirement planning, estate planning and insurance are examples of opportunities now afforded to the average investor. Couple that with access to private investment funds and portfolios and suddenly the average investor has just as much investing power and access to advice as those using a private financial adviser.
Of course online advice may not be right for everyone. Some clients may still want to be able to sit down in front of their adviser and they don't mind paying for that privilege. But for many clients who don't meet the minimums, currently receive little or low quality advice, and who are tired of paying high fees, robo-advisers offer a truly modern alternative.
ALSO ON HUFFPOST:
Stashing away cash for retirement investments is a good idea — but first, it’s important to tackle any high-cost debt (with the exception of your mortgage) that you carry. On credit card balances, you may be paying in the neighborhood of 20 per cent interest. If your investments are earning just 8 per cent, for example, you are losing money and not moving ahead financially. Address high debt before you invest.
The Registered Retirement Savings Plan (RRSP) is an essential source of retirement income. Regardless of age, every Canadian of working age should start one. It allows you (until the age of 71) to put 18 per cent of your earned income from the previous year into a tax-sheltered fund. For 2014, the maximum annual amount allowed is $24,270 and $24,930 in 2015. While long-term growth is the main goal, you’ll reap tax savings each year you contribute.
In the 1980s, Government of Canada savings bonds earned between 10 and 15 per cent interest. These days, it’s just 2 per cent — barely enough to keep up with the rate of inflation. That means you need to get better returns on your savings. Instead of government-issued bonds as a low-risk investment option, consider GICs (guaranteed investment certificates) or corporate bonds for healthier earnings. Shop around at various financial institutions for the best rate.
For many Canadians, their homes are the biggest asset they own and, thankfully due to a strong real estate market, it’s one that has grown in value in recent years. You can add to your retirement funds by selling it, and downsizing or relocating to reduce your living costs.
RRSPs are not the only way to shelter your retirement funds from tax. Now, anyone over the age of 18 can open a Tax-Free Savings Account (TFSA) with their bank. The current annual limit is $5,500. Investment income earned from a TFSA is tax-free. Contributions are not tax-deductible, so if your first goal is to cut taxes it may be best to build up retirement funds by making the maximum contribution to your RRSP first.
You don’t have to give up your career once you hit retirement age. You can continue to work on contract, start your own business, or serve as a consultant. Or find a part-time job that allows you to augment the income you will receive from the government and any corporate pension plans.
A balanced investment portfolio should include some stocks. Choose companies that pay out dividends to shareholders, usually quarterly or annually. Use that money to pay for day-to-day living expenses; or during the countdown to retirement, reinvest that money and purchase additional shares for greater earning potential. Ask your investment advisor for recommendations.
Follow Tea Nicola on Twitter: www.twitter.com/WealthBar