Robo-Advisor

A robo-advisor is an online service that builds and manages an investment portfolio for you. You answer a questionnaire about your goals, timeline, and comfort with risk, and the platform creates a diversified portfolio, usually made up of low-cost ETFs. From there, it handles rebalancing, dividend reinvestment, and tax optimization automatically.

Why people use them

Robo-advisors sit in a nice middle ground. They’re cheaper than a traditional financial advisor (typically charging 0.25% to 0.50% per year on top of the underlying fund fees) and they require almost no effort from you. You set up automatic deposits, and the platform takes care of the rest.

In Canada, the most well-known robo-advisors include Wealthsimple Invest, Questwealth, and CI Direct Investing. They all work in a similar way, though they differ in fees, minimum balances, and the specific funds they use.

Who they’re best for

Robo-advisors are a solid option if you want to invest but don’t want to pick your own ETFs, figure out asset allocation, or remember to rebalance. They take the decision-making off your plate.

That said, they’re not free. You’re paying a management fee on top of the MERs of the underlying funds, which means your total cost is higher than if you went fully self-directed. For some people, that tradeoff is worth it. For others who are comfortable managing their own portfolio, the savings from going DIY add up over time.

A concrete example

Say you invest $50,000 through a robo-advisor that charges 0.40% plus underlying ETF fees of 0.20%, for a total cost of 0.60% per year. That’s $300 annually. If you managed the same portfolio yourself with a self-directed brokerage and bought the same ETFs directly, you’d only pay the 0.20% ETF fee, or $100. The $200 difference is what you’re paying for the convenience of automated rebalancing and hands-off management.