It’s been several years since the term "robo-advisor" surfaced and it still leads to a lot of questions. So many in fact, we have an entire webinar next week dedicated to explaining what they are and how they work. However, in the past few years, a new investment known as an all-in-one ETF has emerged.... and they are giving robo-advisors a run for their money!

If none of this makes sense and you are still stuck on ETF, keep reading.... especially if you have a lot of mutual funds in your RRSP or TFSA.

ETF is short for Exchange-Traded fund and in some ways it is similar to a mutual fund — both products usually includes a basket of stocks, bonds and other investment products. They may be well-diversified across industries and countries or focus on one industry segment or geographic region. There are thousands of ETFs and mutual funds available to Canadian investors.

The main differences is that ETFs are actively traded and can easily be bought and sold with an online self-directed investment account by people like you and me. Mutual funds are usually handled by an investment advisor, bank or brokerage, and you need to go through them to buy or sell. Mutual funds can have high Management Expense ratios (MER fees) that can greatly erode the value of your investment over time.

A robo-advisor is an automated, online financial advisor that will select and manage a portfolio of ETFs for you. Users can get started by simply answering an online questionnaire or survey about their investing preferences and risk tolerance. Your data is then used to select from portfolios of exchange-traded funds (ETFs) which the robo-advisor continuously manages to keep in line with your pre-determined risk profile — buying and selling funds as required and re-investing dividends.

If you don’t want to jump into DIY investing but still want the low fees and freedom of foregoing a living, breathing financial advisor, a robo-advisor may be the perfect investing option for you.

Are they any good?
If you know very little about investing and are strapped for time or just don’t want to learn more, a robo-advisor is a good choice. You give up flexibility in what you invest in (no stock or fund picking), but you can be assured that your portfolio is being managed to mirror your preferences while you go out about your other business — it is sometimes called "set and forget" investing. However, like any investment, you should be regularly monitoring your returns and making adjustments as your risk tolerance/life situation changes.

We can’t tell you whether a full-service financial advisor and their mutual funds will yield better returns than a robo-advisor — they may or may not! Our view is that it is very difficult for anyone (professional or not) to consistently beat the market. Passive investing with low-cost ETFs is a trusted strategy and robo-advisors make pursuing this type of strategy convenient and easy with a simple, low-cost fee structure.

All-in-one ETF?
If a robo-advisor sounds pretty good, there is one other investing option you should consider, and that’s the all-in-one ETF (sometimes called an asset allocation ETF). It’s basically an ETF made up of a number of ETFs.

There is no questionnaire or survey to help you and you will have to evaluate your own risk tolerance and choose an appropriate all-in-one ETF. However, it will save you the effort of having to select and balance a portfolio of ETFs. This is an excellent option for those looking to take control over their investing, but do not have strong enough skills/interest to adjust their ETF holdings to manage/maintain their risk profile and investing goals.

Which one is best for me?
For a lot of us looking to simply invest our RRSP or TFSA, fees should be a prime consideration. An all-in-one ETF isn’t as completely hands-off as a robo-advisor, but the value comes in the form of much lower fees. An all-in-one ETF might have an annual fee of around 0.25% versus the 0.7% fee of a robo advisor. Some institutions have a minimum account size for a robo advisor, so that may be a factor if you don’t have a lot to get started. Robo-advisors can be easily adjusted when your life situation changes whereas you have to be more involved with all-in-one ETFS and make your own decisions on which one(s) to hold as your life situation changes.

Please be aware that there may be considerable fees or penalties when selling mutual funds and switching to a robo-advisor or all-in-one ETF — consult with your advisor.

Resources:

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