Your Canadian Investments: is Robo-Advice a good option?

In recent years, robo-advisors have become a trendy alternative for tech-savvy investors who want to minimize the fees they pay for investment advice. Robo-advice may seem like a convenient, low-cost option for investors, but in most cases, the risks outweigh the benefits.

The Robo-Advice Pitch

Robo-advice platforms promote themselves to people who have small amounts to invest or straightforward investment needs. Robo-Advice platforms also highlight the convenience and flexibility of their services: robo-advice clients can “meet” with their robo-advice platform with minimal disruption to their schedules. Additionally, some robo-advice platforms offer a hybrid model, allowing interactions with “real” advisors (typically on chat or video) for an additional fee.

Robo-Advice Disadvantages

There’s an abundance of online investment information available to us, and it’s easy to think that you can, with a little “robo-help”, research your way to good investment decisions. Unfortunately, investors who choose robo-advice generally underestimate the complexity of today’s investment market and can struggle to find their best approach to investing.

Research: Timing is Everything

During your research, you may hear of market sectors to avoid, business initiatives that make certain investments attractive, geopolitical news that is affecting stocks and government policies that are affecting the market. Even if this information is correct, typically the market has already responded to the information well before you’re hearing about it. Therefore, if your research leads you to buy an attractive stock, it’s likely that it’s already overvalued by the time you purchase it.

Robo-Advice and the Advisor-Client Relationship

In Canada, a financial advisor must meet “Know Your Client” (KYC) requirements before providing financial advice to their clients. During the KYC process, the advisor asks their client for information such as their investment objectives, their investment knowledge, their risk tolerance and the time horizon for investments. The KYC conversation can also be a time of discovery for the client, often clarifying ideas about their investment approach and the risks they’re willing to take. Plus, investment approach and risk tolerance can change over time, and your advisor will regularly consult with you to ensure that they understand these changes. Understanding this client information allows financial advisors to use their years of financial experience to provide outstanding investment advice.

It’s very difficult for robo-advisors to duplicate the KYC conversation or the advisor-client relationship. Some robo-advice companies attempt to deal with this deficiency by having clients fill out KYC questionnaires, or by having a chat or video consultation with a consultant. Unfortunately, these measures do little to replace the advisor-client relationship, so it’s up to you to understand your risk tolerance, your investment objectives and other important investment considerations.

The Bottom Line

Without an experienced advisor in their corner, it’s difficult for most people to pick the best investment solution with only their research and some help from an algorithm. For most investment situations, the risk of choosing the wrong investment solution far outweighs the risk of paying fees for excellent investment advice from an experienced financial advisor.
At Sterling Advisory, we make it our responsibility to understand your specific background and investment needs before we offer financial advice. To find out more about our approach to advising, contact us.