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Short Summary
Main recommendation: For people with simple financial situations who want a hands-off option and don't mind paying a fee, Robo advisors such as Wealthsimple can be a reasonable choice, but a do-it-yourself (DIY) approach using low-cost index ETFs or index mutual funds is often better value and is accessible to nearly anyone. Ben Felix argues that Robo advisors are not actually run by robots or artificial intelligence; they are simplified wealth management firms that reduce human contact and fees through technology.
Key Points
- Robo advisors do not use artificial intelligence or machine learning; they are pared-down wealth management firms where you open an account and choose a portfolio online without speaking to a human.
- Their main value is ease of use: they implement and rebalance the portfolio for you, which is the biggest hurdle for many investors.
- That value has been partly eroded by Vanguard's one-fund, self-rebalancing ETF solutions in Canada, which make DIY investing less intimidating.
- Wealthsimple's convenience features (adjusted cost base tracking, tax-loss harvesting, monthly contributions) only add real value in certain situations, such as having taxable accounts, and DIY alternatives exist for each.
- Based on his own anecdotal observation of Wealthsimple customers, Felix suggests their automated portfolios tend to be on the conservative side, which could impose a substantial implicit cost given that asset allocation is a major driver of returns.
Details Worth Noting
- Concrete instructions: For a DIY approach, buy low-cost index ETFs or index mutual funds yourself; Felix points to Vanguard's one-fund solution ETFs (a single self-rebalancing ETF instead of three or more) as a simpler DIY option. Justin Bender's YouTube videos walk through purchasing an ETF, and his guide explains how DIY investors can track their adjusted cost base in taxable accounts. Dan Bortolotti, Felix's PWL Capital colleague, popularized the idea of managing your own index-based portfolio through the Canadian Couch Potato blog. For regular monthly contributions, Felix suggests TD e-Series mutual funds as a slightly less expensive alternative to Wealthsimple's contribution service, though ETFs require logging in monthly to buy units. If you use a Robo advisor, Felix suggests having a conversation about risk, since it often leads to a higher risk tolerance than the automated questionnaire suggests.
- Wealthsimple charges 0.5% of invested assets on the first $99,999 and 0.4% on assets over $100,000 (Felix states he has no affiliation with Wealthsimple).
- Tax-loss harvesting is available only to Wealthsimple Black customers, who must have over $100,000 invested, and matters only in taxable accounts; a DIY investor can harvest tax losses themselves.
- As of June 25, 2018, ten Wealthsimple employees were licensed to give investment advice, which Felix calculates as over 6,500 clients per licensed advisor, or roughly 19 minutes per customer if advisors worked 40 hours a week with no vacations.
- Felix says he cannot judge the quality of Wealthsimple's advice, since he has no direct experience as a customer.
Bottom Line
Robo advisors trade fees for convenience; they suit simple, hands-off investors, while the rise of one-fund ETFs and free DIY resources makes self-managed index investing a strong alternative for most people.
