The banking industry has been disrupted with online-based banking, eliminating the need for customers to go into branches. Similar trend has been happening with the investing industry over the past couple of years. Robo advisors in a sense, are eliminating the ‘middleman,’ also known as financial planners. In Canada, there are currently over $11 billion in assets under management by Robo Advisor platforms – a 19% year over year increase. The number of users in Canada remains to be just under 850,000 – however this number is expected to grow to more 1.6 million users by 2024, as more Canadains learn about the benefits of Robo Advisors.
Now – what are the benefits of Robo-Advisors? What’s the hype about?
Easy Way to Invest
Especially for those who are working a 9 – 5 day job – managing your investment portfolio can be a little tricky (since the markets close at 4 pm). As the name suggests, the whole purpose of robo advisors is to automate your investments, based on your risk tolerance. In a sense, robo-advisors are somewhat a similar concept of investing in mutual funds. It can be considered as a ‘passive investment’ strategy.
One of the biggest benefits is saving on the hefty portfolio management fees, usually charged by mutual fund managers. Mutual funds usually have a management expense ratio of around 2.5%, whereas Robo Advisors charge around 0.50%. Mutual funds are pricier due to the fact that they’re more actively managed (i.e. by portfolio managers). Robo advisors limit the need of portfolio managers, hence the savings are passed on to investors.
Each robo-advisor platform consists of questionnaires, prior to opening the account. The objective of the questionnaire is to determine the personal finance situation of the investor. Included to, but not limited to, risk tolerance, networth, investment objectives (i.e. for retirement, down payment on a house, etc).
Robo advisors are known as the investing shortcut for millennials. A mix of financial savviness and a focus on user experience (depending on the robo advisor, some provide interactive data on the investment performance). Especially for those who are still learning about the stock markets in general, robo advisors is a great way to get started on investing, with various portfolio options available, depending on the risk tolerance & investment objectives.