Should You Invest With a Robo-Advisor?

Robo-advisors offer a cost-effective solution for passive investors, but you can forget about buying individual stocks such as Canopy Growth Corp. (TSX:WEED).

| More on:
The Motley Fool

These days, you simply have to sign up for a self-directed brokerage on any internet-capable device. You’ll have immediate access to a variety of equity, fixed-income, and derivative instruments at a fraction of the cost of a human broker. But for those who simply don’t have time to monitor their portfolios or any inclination to do so, a recent advancement that might pique their interest are robo-advisors.

Robo what?

Robo-advisory, in a nutshell, is investment management entirely through an automated program based on your risk tolerances and investment horizon. After determining the investor’s profile, the program, or “robot,” will create an investment policy statement and place the investor in a pre-configured portfolio set around some sort of mandate, such as growth, income, balanced, or any other combination.

The biggest draw of robo-advisors is, of course, their low cost; thanks to the instruments the platforms use (primarily ETFs), robo advisors can get away with charging fees of about 1% or less of an investor’s portfolio, which is significantly cheaper than what a human advisor might charge. We are also beginning to see robo-advisors offer valuable features such as automated tax-loss harvesting, which were once solely in the domain of human advisors.

According to research from Morgan Stanley, the robo-advisor market could reach $6.5 trillion in global assets under management (AUM) by 2025. Furthermore, growth in the industry has been averaging a breakneck 86% year over year, while over 70% of firms with greater than $15 trillion AUM and other financial companies surveyed by Morgan Stanley have either introduced robo-advisory as part of their services or are planning to do so in the next 12 months.

This competitive landscape bodes well for investors. We will begin to see more features rolled out for robo-platforms, while fees are kept under pressure. There is also a high possibility that robo-advisory will eventually cannibalize or encroach upon mutual funds and human advisory services, which, combined with the changing landscape of fiduciary regulation in Canada, will also begin to see pressure on their fee structures.

Should you invest with robo-advisors?

Ultimately, the answer lies entirely with your degree of customization. Generally, robo-advisors have little to no contact/feedback with the client once the initial policy statement has been established. While you can track your portfolio’s progress, you can give zero input on its direction, nor will robo-advisors offer anything more complex than the most liquid of ETFs.

Obviously, those of who wish to invest in actual stocks like Canopy Growth Corp (TSX:WEED), for example, or are students of the markets (Foolish readers should check out our Pro 2017 Survival Guide to turbocharge their portfolios) should stick with self-directed investing.

However, the low-cost structure of robo-investing is quite tempting. With most places charging just 1% of AUM, there is no reason to not consider a well-balanced portfolio that’s managed by an emotionless program at a fee equal to that of an index fund. Currently, robo-advisory’s appeal lies with the under-40 crowd with less than $100 thousand worth of investable assets. So, if you’re young, tech savvy, and looking to start a small, low-maintenance retirement account, then robo-advisory might be the way to go.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Alexander John Tun has no position in any stocks mentioned.

More on Investing

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

Is Magna Mining a Good Stock to Buy?

Magna Mining is a Canadian penny stock that trades at a cheap valuation in June 2025, given its growth estimates.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Dividend Investors: Why I’d Buy Telus Stock Over BCE Any Day

Telus (TSX:T) has a higher dividend yield and potentially more attractive comeback story.

Read more »

Canadian dollars are printed
Stocks for Beginners

Transform Your $7,000 TFSA Contribution Into a Wealth-Building Machine

Looking to turn your TFSA into a wealth-building machine? These stocks can help do that and much more, all on…

Read more »

Canadian energy stocks are rising with oil prices
Dividend Stocks

Should You Buy This Energy Stock for Its 9.4% Dividend Yield?

Alvopetro Energy is a high yield dividend stock that trades at a cheap multiple in June 2025, given its growth…

Read more »

worker holds seedling in soybean field
Dividend Stocks

1 Stellar Canadian Stock Down 42% From All-Time to Buy and Hold Forever

Not only is this dividend stock a great long-term buy for income, but also for its value.

Read more »

grow money, wealth build
Dividend Stocks

High Yield + Growth: 2 Generous Dividend Heavyweights to Buy Today

Enbridge (TSX:ENB) and another dividend stock prove you can have gains, superior dividend growth, and high upfront yields.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

Retirees: How You Could Earn $466 a Month in Dividends With Less Than $100k in Savings

Canadian retirees should consider owning blue-chip TSX dividend stocks such as Enbridge to generate a growing stream of passive income.

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

Retirees: Use a TFSA and Generate Tax-Free Income, Plus Avoid the OAS Clawback

The TFSA is a great way to create income for life, especially with a dividend stock like this.

Read more »