Post image for Robo Advisors – Is your future financial advisor a robot?

Robo Advisors – Is your future financial advisor a robot?

Robo Advisors – Is your future financial advisor a robot?

There is a lot of discussion in my industry about robo advisors, and recently the CBC ran an article on their website titled “Robo-advisors could pick your investments: Online advice by computerized program seen as accessible for new generation of investors”, which inspired this response.

First of all, they aren’t robots per se, but rather computer programs. Automated financial advice is generated by software programs developed by specialized wealth management firms that take your information and run it through their calculators. Some rely solely on algorithms; others involve an online advisor or are a combination of both. The robo-advisors take you through a series of questions to determine your goals and your risk tolerance and then build a diversified portfolio using passive investments like index funds and ETFs.
They are gaining interest in the US, and younger Canadians in particular may be interested although the concept has yet to be fully established here. Benefits include:

  • Costs for the investments are low, so they could work out well for clients who may be underserved by a financial advisor.
  • Your attention is on the forest, rather than the trees i.e. the focus is in bigger picture and longer term, rather than just looking at buying or selling a particular stock.

But there are risks…

  • Would the software be sophisticated enough to assess a client’s tolerance for risk and to adapt with changing markets and/or deal with investments that might be more sophisticated.
  • People’s risk tolerance is often different than what they put down through a questionnaire. They may say they are comfortable with a 20% drop in value, but the reality is somewhat different. It is easier for an advisor to have a discussion with a client and get a better sense of what they are comfortable with.
  • A lack of non-financial advice such as managing client expectations, and getting clients in the habit of doing the right thing with their income, such as regular savings.

The biggest downfall is that there is a lack of financial advice for the investor. Financial planning is an art as much as a science, and there isn’t room with robo-advisors to give advice such as how to structure ownership of investments to help with estate planning, or which type of accounts are best to use to save taxes in your circumstances. These benefits are lost with a robo advisor.

Photo credit: Damian Dovarganes/Associated Press

This article was prepared solely by Laura Chanin who is a registered representative of HollisWealthTM (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Laura Chanin alone and not those of HollisWealth.
TM Trademark of The Bank of Nova Scotia, used under license.