What is a Robo-Advisor?
Recently, a lot of people have been asking me about robo-advisors, or what is the easiest way for them to get started on investing. Especially for beginners, robo-advisors are the way to go. In a sense, it’s a hack/shortcut to investing. It’s a great alternative to the traditional financial planners/advisors situated in brick & mortar branches.
How it works
Robo advisors invests in a group of Exchange Traded Funds (ETFs), based on your personal financial circumstances (which is uncovered through a questionnaire filled out during the online account opening application process). Thereafter, the platform automatically buys/sells ETFs, to ensure that the portfolio remains balanced.
A typical questionnaire would typically include the following:
- Financial Goals: what’s the purpose of the savings? I.e. is it for a car, house, travelling? These are some of the common financial goals. Millennials should also consider saving up for a down payment for pre-construction homes – the easiest way to enter the real estate market.
- Age: the younger you are, the more risk you can take. Age plays a huge factor when it comes to risk tolerance. Someone nearing retirement would most likely have their money in more fixed income assets, whereas millennials can usually afford to take on the risk of equity investments
- Time frame of your investments: similar to the factor above, timing plays a huge factor when determining how much risk you can take. More risk can be taken on when there’s a longer time frame
- Assets: percentage wise, how much of your money would be invested within the portfolio? This aligns with the “don’t put all of your eggs in one basket” investment rule. Theoretically, it would impact your risk tolerance if the account being opened is your only investment.
- Knowledge & Behavioural Questions: how well do you understand your investments? How would you react if your portfolio dips 20% in one day? An 100% equity portfolio may not be the right choice if your immediate reaction is to sell everything.
Recommended Portfolio Allocation
You’d receive a recommended portfolio allocation, based on the answers provided to the questionnaire discussed above. The portfolio allocation typically falls within the three categories below:
- Conservative: you’re not a risk taker – like the peace of mind knowing you’ll get cash flow from fixed income assets/investments.
- Balanced: you’re in the middle – you like risk, but at the same time, you’d like some sort of fixed income coming in. This usually consists of a fair split between equity & fixed income assets.
- Equity: If you’re a risk taker, in it for the money, and have a long term investment objective, this portfolio would be the best fit. It consists of mostly equity investments, usually greater than 70%, depending on the robo-advising platform.
JustWealth offers over 60 portfolio options, rather than just the common 3 portfolios mentioned above. This is perfect for those who are looking to have an investment portfolio that’s specifically tailored to their needs.
The robo-advising industry has been getting more competitive the past couple of years, with decreases in fees, and various promotions going on. The average fee within the industry is 0.50% of the funds managed – much lower than their mutual funds counterparts, which is usually north of 2%. Some robo-advisors charge a lower fee if you have more investments under their name. JustWealth charges 0.40% for assets over $500,000.
I highly suggest robo advising platforms because it of the three main benefits:
- Automating your investments: eliminate the worry of buying/selling stocks or mutual funds. Robo-advisor provide the benefit of automatically rebalancing your portfolio on an ongoing-basis, ensuring that your investments are aligned with your objectives.
- Diversifying assets: these platforms invest in a variety of ETFs, which consists of a wide range of stocks. This limits the over exposure to one particular industry or stock.
- Simplicity: robo-advisors make investmenting a lot more engaging, with the interactive user experience, transparency, and low fees.
There’s also a special promotion for Bay Street Blog readers; click here to receive a $50 credit for opening a Robo Advisor with JustWealth.
If you have any additional questions, feel free to comment below. Happy investing!
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Writer: Jelani Smith
Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.