Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.
My guest this week is Kyle Prevost, host of the Canadian Financial Summit, and an expert on robo-advisors. In this episode, Kyle and I discuss what exactly a robo-advisor is, how they can help you get started with investing, or just transition to a more hands-off approach.
Kyle highlights a few leading Canadian robo-advisors and explains why the robo-advisor concept is a lot more ‘human’ than the name may suggest.
As mentioned, Kyle hosts the upcoming Canadian Financial Summit, an online event that you can stream on your favourite digital device. It runs from September 12th-15th, and is completely FREE!
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- What exactly is a robo-advisor?
- How robo-advisors can eliminate human error.
- The differences between robo-advisors and ETFs.
- Who are the top robo-advisors in Canada?
- Why it might be a good idea to test drive multiple robo-advisors.
- How fees are affecting your investment returns.
- Why you should choose the platform that will encourage you to invest.
- Kyle touches on the upcoming Canadian Financial Summit.
Have you heard about robo-advisors? Or maybe you’re just tired of do-it-yourself investing. My guest this week Kyle Prevost, hosts the Canadian Financial Summit and is an expert in robo-advisors. Kyle breaks down what a robo-advisor is, why there is a wizard behind the curtain and how they can either help get you started investing or switch to an easier way to invest.
Welcome to the Maple Money Show, the podcast helps Canadians improve their personal finances to create lasting financial freedom. Having a good credit score is important to help you achieve your financial goals. It can help you get better rates on your mortgage, insurance or personal loan and can ultimately help you save money. That’s why you should get your free credit score from our sponsor Borrowell today. Check them out at maplemoney.com/borrowell. Now, let’s talk with Kyle…
Tom: Kyle, welcome to the Maple Money Show.
Kyle: Hey Tom. Thanks for having me.
Tom: I think you’re probably the first person that even really told me about robo-advisors in Canada. But before I had fully clued in, you were in on this really early so I figured you are the best person to kind of bring on the show and really get into it. We’ve talked about ETFs a couple times on the show and just lightly touched on robo-advisors but I want to take this time while you’re on the show and really dig into everything about them.
Kyle: Yeah, it sort of happened by accident that I had suddenly start described myself as an expert because I was, for a long time, on that ETF passive investing train and I still am. But yeah, that’s sort of naturally led me down the robo-advisor path.
Tom: So can we go right back to the basics. What is a robo-advisor and what do they do?
Kyle: I always start when I describe when robo-advisor is by saying that it’s kind of an unfortunate sector name that they’ve been given. I’m not sure that it happened organically when I look at some of the entrenched interests in the financial world. Because, when you think of the term robo-advisor there’s all sorts of associations with robots, computers and non friendly, non-human things. What robo-advisors simply are, they’re automated investing solutions that you will set up with the help of another human being if you want. All the major robo-advisors that we have in Canada have a ton of different ways to talk to a real live person whether that’s on a phone, through a chat box, Skype interview, email… whatever is easiest for you. You will not have to invest money before you talk to human being. I can tell you that right now. The good news about an automated investment service such as a robo-advisor is that it’s going to take away a lot of the human error that we often make. When I say human error, I mean things like our brains telling us we need to sell a stock because we saw the stock price going down. Or we heard someone talk about it at the water-cooler—those types of human errors are only natural. Our lizard brains are sort of hard-wired to make these mistakes. And even though we know about passive investing, we know about ETFs—and I literally wrote a book on ETFs and I tried to help people passive invest that way, it is still really hard for a lot of people to take their hands off the steering wheel and let that automated control take over. But statistically speaking, it is going to be a good bet. Passive investing with a robo-advisor using automation to your benefit is going to be your benefit in the long run.
Tom: Maybe this stat doesn’t exist but I wonder how many people sign up and they don’t realize that they can actually talk to someone. Have you ever heard anything about that?
Kyle: We did a poll on robo-advisors at Young and Thrifty a few months ago and I do remember that roughly a third didn’t use the—they never bothered to contact a person but there was two thirds that had. To answer the question, I guess, I think they make it pretty apparent that you can. But there are a lot of people that say, “Read Maple Money,” or read another site. I think they know sort of the ins and outs of robot-advisors and really just want the automated solution, super simple… being able to send in automatically get their paycheck, shoot a certain percentage of it off to a robo-advisor, get a nice diversified portfolio that they understand and never worry about it again. And I guess you don’t really need to talk to a person to understand the math behind them.
Tom: Yeah, I’ve told you before I’m considering the idea of going over to a robo-advisor and it’s not because I don’t still love the thrill of rebalancing my portfolio but it’s also just to free up some time and it’s not necessarily that I need to talk to someone. It’s nice to have someone to talk to but it just to sort of outsource that and get one more thing off my plate. That extra 0.4, 0.5 percent doesn’t sound that bad to me.
Kyle: When I write about robo-advisors—a lot of people who say, “Well, we’ll see what return I get with robo-advisors.” Now, we say, “Well, you’re missing the whole point. This isn’t some new investing system. All robo-advisors do is take the Nobel award winning passive investing strategies and make them as easy as possible. And so what they really represent is one spot on the continuum between completely picking your own stocks with a stock broker, or discount brokerage if online. And it’s a full advisor where they’re likely to be putting your money into (if you live in Canada) fairly high cost mutual funds. And that costs a substantial amount of money. Too much to my way of thinking. Way more than I’m prepared to pay or recommend anyone else pay, especially in Canada. You can pick your own stocks. Vanguard has a really cool product out now where it’s almost like a robo-advisor. Several ETFs will rebalance in one. And then the next step up on that continuum is a robo-advisor where if you want some advice on whether you should contribute to a TFSA or an RSP, most robo-advisors will be able help you with that. If you ask them about setting up an income trust. If you’re fortunate enough to build a substantial wealth in your life, I’m not sure that all the robo-advisors will be able to handle something complicated like an income trust or long-term wealth management advice. But for the vast majority of young people in Canada and people with an average amount of assets, robo-advisors are going to give you just as much (if not more) advice than you’d receive typically at a lot more full-service, more expensive options in that continuum.
Tom: I think their advice is probably a little more unbiased because ultimately they’re just recommending these market ETFs. There’s none of this “car salesman” approach that you might get in other places.
Kyle: Yeah. And legally their portfolio manager—which means in Canada they have a fiduciary duty. Most people are surprised when you start digging into the weeds on this a little bit and there’s weird words like fiduciary, but you can call yourself an investment advisor. In fact, in my personal finance course in this classroom here, I get the kids to make their own personal advisor or financial advisor sticker and put it on just to prove that literally anyone can call themselves that. There’s no rules regulations around it. And the crazier thing is that they are actually not legally bound to give you good advice. They can give you advice in Canada that will pay them much more in commission but it may not be in your best interest. And as of today, there is hardly any depending on the province you’re in. There’s hardly anywhere to go or any laws to support you if that person does not have a fiduciary duty to you. Now, if they are a portfolio manager and they have their fiduciary duty there’s a lot of laws and they’re very clear. So in a lot of ways robo-advisors voluntarily are held to a higher standard than a lot of other investing options out there in Canada.
Tom: With this basically just being ETFs that rebalance themselves, I think you’ve kind of already touched on this answer, the idea that you’d thing, why wouldn’t you just do it yourself? But is it basically that financial advice and that’s the extra little bit?
Kyle: When I first started looking at robo-advisors that’s what I thought. We talk about 0.1 and 0.4 – whatever way folks want… three percent doesn’t sound like a lot when you’re talking about off the top of your investments. That’s a ton of money depending on how you want to play around with it, what calculator you want to use. For a lot of people that’s hundreds of thousands of dollars through time. Then when we look at the difference between rebalancing our own ETF portfolio we’re looking at maybe 0.15, somewhere in there. And then the Vanguard all-in-one ETF solution which I think is like 0.22 or 0.24 depending on which one you choose. Then you’ve got the robos that are 0.45 to 0.8 at the high end. I thought the difference there, which is still substantial but it depends on what you want to pay for it, was the advice. I think now I’ve come full circle and actually think what you’re paying for more than anything is the convenience factor. It cannot be underestimated. Just taking your behavior out of the picture, even with a discount brokerage time. When you’re talking about rebalancing a lot of people just forget to go on and manually send that transfer to their discount brokerage account. Then they’ve got to do a little bit of math and that’s just enough of an obstacle to put it on the back burner and go play golf or whatever. That automated solution of just every month or every two weeks or even every three months setting up an automatic deposit and having it just dispersed around the world through broad ETFs, I think that’s what you’re paying for more than anything. But it is nice to know that there is someone at the other end if you want to send an e-mail, “Hey, I was just thinking about whether I want a little more risk. How did we talk about this when we first set it up? It’s been a few years now and I’m looking at retirement, should I look at this?” Or even something setting up RESP for your children. What options do you have? It’s comforting to know that there’s some people behind the computer that can answer all those questions for you.
Tom: Yes. It’s always nice to ask someone about something even if you thing you know everything. It’s no different than you and me when we write a blog post; it’s still nice to have someone else look at it. It doesn’t matter what you know it’s always nice just to bounce ideas off if nothing else. When you were explaining the difference between robos and ETFs, there’s one thing that kind of sits in the middle for me. What about the new product, Passive, that can connect to Questrade and basically rebalance within a couple clicks?
Kyle: I have to admit I haven’t used Passive yet so I probably am not the expert on it. Again, I would assume, basically, what happens is there somewhere in the continuum. Do you know off-hand what they charge? What their rate is?
Tom: Yes. I don’t want to misquote it but I think it’s $60 a year. And I believe there’s actually a free option which is a little more manual. But if I’ve got it right I believe $60 a year gets—I think they send you an email. The option that sounded best me was buy only. Just buying of the underperforming ETF and it’ll automatically rebalance for you. Certainly ETFs that are underperforming, those are the ones that automatically buys without having to track this on a spreadsheet or something like that.
Kyle: That’s basically what I understood. And I think it’s just another point in that continuum where you’re willing to pay for it to rebalance. To be honest, if it were me I would have to compare it against the Vanguard all-in-one ETF solution. Just because if you don’t mind doing the legwork of opening this discount brokerage and sending the money there from your account, just buying that one or two ETFs that Vanguard offers… Well, it’s one ETF. You’ll pick what your own risk profile would look like and you’ll go from there. So I would have to compare against that. But obviously, you’re giving up a little bit on the advice end. Even on the design side—that’s another thing which robo-advisors that I’ve found and recommending them to a lot of my friends is their platforms are just put together by really smart people and they look really nice. Wealthsimple has done some cool things recently with email on that. When you have such a big group of smart people designing something, that design encourages you to use the platform. In the case of investing for the future, just getting that behavior, that consistency in investing can be the difference between that million dollar retirement nest egg or a $200,000 retirement nest egg.
Tom: Yeah, if it gets someone started, for sure. Not only is much easier to sign up than with a broker, you can literally do it on your phone. Then they’re getting that advice on top… that’s probably two of the bigger barriers on how to buy stocks question.
Kyle: Yeah, it is, for sure.
Tom: You can just decide today just to sign up for robo-advisor and you’re done. Can you run through some of the top robo-advisors and what makes them unique? Every time I’m asked what my top pick is, it’s tough because it seems to depend on your needs. There’s a lot that’s the same about robo-advisors but there’s little differences too so I was wondering if you could run through what’s better for what kind of person?
Kyle: We’re pretty unique in Canada. Down in the States there’s a couple of big fish that swallowed the others pretty quick when it came to robo-advisors. In Canada, we seem to have found each one has their niche. Maybe that will change one day but I like it. For Canadian consumers right now, I think it’s awesome because you can compare and contrast and there’s obviously competitive pressure on each of the robos to compete with one another and keep their prices low. There’s everything from BMO and RBC. Now, they technically don’t call their platforms robo-advisors. They are a little bit different and they are a little bit pricier than some of the other options on the market. But if you’re looking for a trusted brand name and just ease of use… If you have already an RBC checking account or BMO checking account they’re so easy to use and they’re all on the same dashboard when you log in. You’re going to get a pretty good diversification there. They’re mostly passive investing. If you’re looking to stay with your big fish that you’re comfortable with that’s certainly better than a lot of investing options that have been out there in Canada. By far the biggest, you’ve probably seen commercials for them if you live in Canada, it’s Wealthsimple. If I had an award for best marketing and ad campaigns amongst almost any product it might go to Wealthsimple. I think they did a fantastic job of marketing. Because of their size they’re also able to offer a lot of platform options that some of the other robos aren’t. And just through their sheer size they are able to innovate a little bit easier. They just have more hands on deck than some of the other robos do. I would say the feedback I’ve heard is they are very user friendly. They gear a lot of stuff toward young people. Like you said, Tom, you can sign up on your phone which not all robo-advisors do— Wealthsimple was the first one. You can hook it up to Mint if you’re into budgeting. So they’re kind of a great all around option. I encourage you to compare what Wealthsimple has to offer with what else is on the market. You’ve got companies like Nest Wealth who are great for all investors. They are subscription based service so they charge their fees a little bit differently as it’s not a percentage of the money, it’s an overall subscription service which a lot of people think are going to be the future of the industry. Especially, if you have a sizable portfolio Nest Wealth really makes a lot of sense because you don’t want to be taking that same percentage off. Why should we be taking a percentage off of a million dollars the same as you would off of $100,000 is the argument a lot of people make up. Then you go into Modern Advisor where they have probably the absolute lowest cost (the last time I checked), there again, is another solid product to compare. And then there some of the smaller fish that really bank on offering unique aspects. One of the most unique ones that I’ve seen is Wealthbar. They really pride themselves on offering some different socially responsible investing and giving you the best access in the business. This is debated but it’s what they pride themselves on—the best access to human beings and setting up a personalized account. And they also do a neat little thing where they’re going to put a slim part of your portfolio into an alternative investment. Almost like an infrastructure investment. I’m not sure because I haven’t read all the studies to see if that’s going to give you upside results but it’s a bit of a different take on traditional couch-potato ETF investing. And finally, correct me if I’m wrong here Tom, but I believe it’s Justwealth that has the target date RESP? Is that correct?
Kyle: That’s kind of a unique product. I know the guys that run Justvault. They’re platform maybe isn’t as shiny but they always say that they’re not a tech-fin; they’re not a technical financial company. They’re fin-tech— financial comes first. And they certainly have the background to back that up. They’re the only ones that I know of that have a target date RESP. That’s a really cool product if you’re a parent out there that doesn’t really know how to get that RESP going, I encourage you to look at Justwealth and check out what they have going there.
Tom: Yeah, I think they have the most portfolio options, period. There’s a lot of different little niche things they offer. I fully agree that Wealthsimple is the easiest overall pick. I should mention they’re often the sponsor on this show but that is not affecting my opinion of them. They are one of the biggest ones out there so it’s the easy answer but it’s not the perfect answer. Like you just went through, everybody needs a different thing. If it’s an RESP, there’s definitely better options.
Kyle: What I tell people is a lot of these companies— in fact, all of them I believe I mentioned, right now they’re all competing for clients and they all offer either a certain amount of time or a certain dollar figure, managed for free. I tell people to do their homework. Pick your top three and then just get a feel for the companies. It’s not going to cost you anything. It’ll cost you 20 minutes to set them up. It’s even interesting to see how different robos are if you answer the questions a certain way on the initial risk tolerance, the different like risk profiles, that they will start you off at… Just see which one you’re most comfortable with and then go from there.
Tom: That’s interesting. You mean to go all the way through with signing up? Like, if you have $3,000 put $1,000 in each?
Kyle: That’s what I’ve recommended. In a lot of ways it’s the most frugal option, actually, because you don’t owe any fees on that money. And, any fees that are charged to leave the company, the other company will usually pay to bring that account over because they want your business. A lot of people come to some interesting conclusions and I can’t say (out of all the people I’ve talked with) any one specific robo is always picked. It’s interesting what different people value and subsequently which ones they chose.
Tom: Yeah, it’s like you said earlier it’s interesting in Canada that everyone’s kind of carved out their own little niche here and there isn’t just one robo advisor that necessarily sticks out a 100 percent over everyone else. There’s one new robo-advisor—and maybe I’m only asking this for my own personal interest, but Planswell. I know nothing about them. Do you know anything about them? I wonder if there’s something that makes them different as well.
Kyle: I wrote a review on Planswell and I would say their closest comparison is Wealthbar. Planswell is very interesting in that they’re not just a robo-advisor. I call them robo-advisor plus because in a lot of ways they ask you… It’s actually quite a substantial questionnaire you go through when you start. Based on that, they make not only investment recommendations in terms of risk profile but they also make insurance recommendations and they will actually look at better deals you can negotiate on your mortgage. They’re actually an insurance broker, a mortgage broker, and a portfolio manager all-in-one which is kind of cool because a lot of Canadians don’t understand that they can save a lot of money on their mortgage if they were to renegotiate. And that they don’t have to take that 5-year fixed rate that’s on the letter that their bank mails them every five years. Because insurance is kind of a boring topic and kind of morbid to think about— whether it’s life insurance or critical illness insurance, plans will seek to advise you on that. So they’re kind of an interesting option to check against as well.
Tom: Interesting. The only other thing I really wanted to ask you was with all this coverage you’ve done on robo-advisors in the past, is there one thing you think that they could be doing differently? Maybe something that they’re all missing?
Kyle: Right. I didn’t really think of this—I’m blatantly stealing this from John Robertson and Chris Enns that I heard talking about this one time. They had some interesting thoughts on applying behavioral solutions and applying them to robo-advisors. Almost like forcing people to get a bit of an education into what their money is actually doing. I’ve got so many emails from people (and I cannot emphasize this enough) who say, “Well, I’m going to try this rob-advisor and see how their performance does over two years.” And I say, “I’m telling you right now, that’s not the way to do this.” They may have good returns in two years, they may have terrible returns in two years, but you need to understand what they’re doing—what passive investing is before you’ll really understand what your robo-advisor’s doing for you. So, John, Chris and Sandy Martin (who was another one who was sort of talking about this) could do some cool stuff with email messaging and texting and just give little 10 second or 30 second mini lessons like, “Hey, did you know that the savings rates will do this…?” Or, “Did you know that the best performing market of two years ago was for the Chilean market? Because, we didn’t know that ahead of time. And guess what? Not many people did. And that’s why we passively invest.” I think Wealthsimple has done some stuff in that regard. But I’m a teacher so I’m always biased towards education. They have smart design-oriented people that are going to be way ahead of me, so figuring out little creative ways to sort of slip education into that platform, I think, would be pretty neat.
Tom: Yeah, it’s a good point especially about this idea of performance because I’ve brought up robo-advisors before and the topic always seems to be, “Oh, I prefer this one to that one because they did better over the last six months.”
Tom: It’s just not the point when it comes to ETF or robo-advisors. The only thing you can really focus on is fees. Otherwise they’re roughly tracking the same markets. Yeah, you’re going to get a little bit of index errors but it is not the main point.
Kyle: Over the long run those index errors too, they’re going to even out. Whatever ETFs you’re using… Like you say, really what there is, are the fees. And most of the ones we talked about are pretty competitive on fees. Really, it’s what platform is going to encourage you to invest the most? Whether that means you want a human touch or you just like the way the app looks, I’m not judging anyone. When I started recommending passive investing with ETFs eight years ago to people, most of my friends just had this glazed-over look on their faces. Even though I don’t really think the math is that hard, it’s just got a lot of weird terminology. But, whatever encourages you to invest, whatever encourages you to open that TFSA, RESP and set up automatic contributions, go with that one because your behavior is going to be a much bigger determinant than that 0.1 out-performance or that 0.5 difference in fees you’re being charged.
Tom: It’s like anything related to saving or investing. You’re better off to start now than to spend all that time.
Tom: Okay, well, thank you for being on the show. Can you tell everyone where we can find you?
Kyle: Yeah, the Canadian Financial Summit is just around the corner here. So definitely check out the Canadian Financial Summit. You’ll see Tom is giving some really cool insights on how to make money online. I’ve got really smart folks coming on to discuss various different topics including a little bit about passive investing. So, if you’d like to learn more about that, that’s where you can find me these days.
Tom: Great. Thanks for being on the show.
Kyle: Thanks for having me.
Thanks for listening and thanks again to Kyle for his insight into robo-advisors. You can find show notes from this episode maplemoney.com/kyleprevost. You can even come to the Canadian Financial Summit he hosts. You can sign up for a free ticket to this virtual personal finance conference at maplemoney.com/canadianfinancialsummit.