If you’ve explored the possibility of using robo advisors to manage your investment assets, you’re not alone. Robo advisors first became publicly available to investors in 2008, and quickly became a dominant force. Since 2018, total assets under management by robo advisors in Canada ballooned from US$13.19 million to a projected US$13.74 billion by the end of this year.
This rapid expansion should come as no surprise. The technology offers affordable, low-effort access to automated investment accounts with minimal starting costs, ideal for beginners. “Robo advisors are good for entry-level investors,” says Ian M. Lusher, Portfolio Manager and Partner at Genus. “They’re best for those who are price sensitive but still want a managed portfolio—especially if they want to handle the process themselves.”
But the question remains: are robo advisors truly the most effective investment solution for you?
Robo advisors trade ease-of-use for returns
A recent report indicates that portfolios managed by robo advisors like Wealthsimple’s tend to underperform many other options. For example, according to the report, Wealthsimple’s most popular growth portfolio chalked up a five-year average annual return of just 7% as of May 2024, while while ETFs like iShares Core Growth and Vanguard Growth yielded 9.2% and 8.8% respectively.
Meanwhile, the Genus Balanced Fund made a five-year annualized rate of return of 8.19% gross as of May 2024.
Still, focusing solely on pure returns misses a key point. “Ordinary folks are usually totally happy with their robo advisor’s performance when the market’s in a good place,” says Lusher. “People don’t tend to panic when things are going well. But when the market takes a downturn, they suddenly realize all the risk they’re exposed to, they start asking lots of questions, and they find they don’t have an expert to turn to.”
Robo advisors can be useful for a certain sub-set of investors, but they lack many important investing features
We’re not about to write off robo advisors as a waste of money—millions of people love using them and have reaped substantial rewards. But we believe they’re best used by a certain subset of beginner investors. And for most people outside of that category, hiring an actual human to manage your portfolio is your best bet.
That’s partly because of the way robo advisors create client portfolios. Genus uses quantitative modeling as one part of their decision-making process. Robo advisors use AI as the absolute foundation of their decision-making process—there’s little to no human input, insight or specificity. This results in a number of shortcomings, including:
Lack of risk management
To make robo advisor portfolios cost-effective, they tend to focus primarily on ETFs and other indices. “From one perspective, robo advisors’ focus on ETFs minimizes risk by spreading it across the entire market,” says Lusher. “But from another, they take on the substantial risk associated with full-market exposure. Full-market tracking is often great when the market is thriving, but during a slump, can be difficult for people to stomach.”
Robo advisors also don’t have the nuance to categorize and manage a suite of portfolios, both in terms of minimizing risk and when it comes to minimizing taxation. For example, a human portfolio manager will help you determine which investments should go where in order to reduce capital gains tax and optimize RRSP allocations. With a robo advisor, everything goes into a single bucket. For investors just starting out, this is not usually a big deal, since they begin with a low taxable amount. But as their assets grow, it can become an issue.
“The last thing a client in a high marginal income tax bracket wants is realized capital gains, interest received or dividends received that are not actually needed,” says Lusher. “A robo advisor often does not allocate assets to account type with taxation in mind, often resulting in higher taxes.”
Lack of social impact investment options
Robo advisors also aren’t great at helping you select your investments based on social impact, or avoid problem companies like climate change contributors or weapons manufacturers.
“It’s hard to get even big players like arms dealers out of an ‘ethical’ ETF,” says Lusher. “Though ‘sustainable’ ETFs will have metrics financial companies use to determine who to include and who to avoid, it’s often debatable how ethical some of the companies in that package actually are. Genus’ frameworks for ethical investment are much more clearly defined.” (For more on that, read about Genus’ ‘Theory of Change.’)
Robo advisors can’t help you plan your estate
For a huge subset of investors, one of the most important factors regarding their portfolio isn’t simply returns or reducing tax burden—it’s what they’ll leave to the people they care about. Genus portfolio managers are experts at ensuring your financial legacy is preserved and properly handled, and spend plenty of time with clients planning for the future.
You can’t ask robo advisors any questions
A good portfolio manager will be able to advise you on a custom plan that works best for your unique situation. They’ll strive to develop a connection with you and to understand the particularities of your investing needs. And they’ll be there to address any inquiries or worries you may have.
Some investors balk at the fees associated with a professionally managed portfolio, but with those fees, you’re investing in all of the features described above and much more. The minimal added cost gives you unparalleled access to the knowledge, guidance and expertise of individuals who have dedicated their careers to generating wealth for their clients.
What’s more, the Genus team genuinely cares about your success, far more than an impersonal robo advisor ever can. “It’s better for people to have a personal connection with someone invested in their well-being,” says Lusher.
Whatever you decide, have a conversation with a human wealth advisor first
Above all, Lusher recommends that whatever your investing needs—whether you’re a recent graduate with minimal assets to your name or a soon-to-be-retiree late to the investing game —schedule a meeting with a professional before you jump in. These initial meetings are always free, and they’ll help you determine the best course of action, even if you do end up deciding to go with a robo advisor instead.
“It’s important to start with a discussion to see the differences between a managed portfolio and a robo advisor. Not everyone will qualify for our managed portfolios, and for others it may not be the best option,” he says. “But even if you decide to go with another option, at least you’ll come away from the conversation with a better understanding of how to handle your portfolio.”
Ready to get started? Contact a Genus advisor today.
References:
- Frankenfield, J. (2023, January 26). Robo-Advisor (Robo-Adviser). Investopedia. https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp
- Robo-Advisors – Canada | Statista Market Forecast. (2024). Statista. https://www.statista.com/outlook/dmo/fintech/digital-investment/robo-advisors/canada#assets-under-management
- Carrick, R. (2024, June 26). Wealthsimple is killing it as a company, but the performance of its robo-adviser portfolios does not impress. The Globe and Mail. https://www.theglobeandmail.com/investing/personal-finance/article-wealthsimple-is-killing-it-as-a-company-but-the-performance-of-its/
