Should one go with robo-advisors? | Page 2 | General financial discussion | Discussion forum

By the way, if you're interested, I read an interesting blog post on Canadian Portfolio Manager Blog (yes, less "catchy" than Canadian Couch Potato) by Justin Bender, one of the co-founders of PWL Capital who brought on Dan Bortolotti. I like his style of writing a bit better and he doesn't have that sort of "pretentious"/"I know more than you" aura that tend to permeate from Bortolotti's posts. I agree with most of what Dan writes, I just think Justin's a better writer, that's all. 😉

Anyway, he selects a basket of passive index ETFs from Scotia iTRADE's commission-free ETFs list that are most similar in asset allocation & structure to his CPM Blog's "model portfolios" and then backtests their performance and compares it with the performance of his "model portfolio(s)" over different time periods, the largest being 20 year annualized. In that instance, you're looking at about 0.02% less total return with the Scotia iTRADE commission-free ETFs, which actually surprised me as I looked at trying to do something similar (I'm with Scotia iTRADE ) but wasn't impressed by the "look" of the commission-free ETFs. So, if you don't need a robo-advisor, that's certainly worth looking into. And, if you prefer XIC instead of HXT for your Canadian Equities, you could just substitute that one ETF and pay two trading commissions (one buy order and one sell order), assuming you rebalance once a year. 🙂

It's also worth mentioning performance comparisons are "point-in-time snapshots" heavily influenced by the "start" and "end" dates of the compared period(s) and also that they are not indicative of future returns. However, considering the academic literature available on market returns from index-based investing, there is a fair degree of certainty at least in the ability for index-based ETFs and funds to reasonably match the long-term market returns. 🙂

Worth the read anyway!

Cheers,
Doug

AltaRed said
Trading commissions might matter to those starting out with smallish accounts, but even at $100k, $30-$50 in annual commissions is a drag of only 3-5 bp on performance. Get to $1 million and one is into fractions of a basis point.

I've never been tempted by iTrade's commission free ETFs specifically as it is a case of the tail wagging the dog but it would matter more to frequent traders, and maybe those who follow Larry Berman.  

Yeah, except with a 5 ETF portfolio rebalanced annually, it's not $30-50. You need to have a "sell" order in order to place the "buy" order when rebalancing so, realistically, the least you're looking at is about $80-100 per year, or 8-10 bps on $100,000. Granted, not much and still cheaper than a robo-advisor but for an extra 50-60 bps, you could have a robo-advisor/full service portfolio management firm. I'm not going with a robo-advisor because I don't like their "cookie cutter" portfolios but in terms of all of the other advantages, I think they will put a serious dent in to the declining AUMs of the "Big 5" banks. It's also why I'm increasingly bearish on Scotiabank, which is perhaps the most exposed of the "Big 5" in terms of "highest MER" mutual funds, through its Dynamic Funds and various Scotia "flavours" of their "fund of funds" portfolio options. 🙂

Cheers,
Doug

P.S. I'm not one of those "frequent traders" but would consider myself to be a fairly devoted Larry Berman "convert"/follower.

2017opinionsmatter said
Very informative everyone
I think as TFSA 5500 room coming close again in just about a month and RRSP room coming up in Feb 2018, why not have some with a robo-advisor? In fact having a few self-directed discount brokerage accounts concurrently with robo-advisor accounts itself is diversification. You can hold just stocks in self-directed because you are in total controlled of all trading fees; and hold ETFs in robo-advisor accounts . Broker's low or free EFT trading claim is negligible anyway because
1. Only buying is free, never selling
2. Only eligible ETFs (e.g. ETFs from a particular provider or listed on a specific market...)  

I agree - it depends on your circumstances, though. You definitely have the right sort of information to go ahead and make your decision: self-directed discount brokerage or robo-advisor. Basically, it comes down to, fundamentally, the following three (3) question(s):

1. Am I bothered by monitoring my investment portfolio on a monthly basis, rebalancing quarterly, semi-annually or annually?
- If yes, go with with a robo-advisor.
- If no, perhaps go with a self-directed discount brokerage firm.

2. Do I have the necessary investment knowledge to manage my own portfolio?
- If yes, perhaps go with a self-directed discount brokerage firm.
- If no, go with a robo-advisor.

3. Do I generally favour the academic research that indicates greater than 75% of the time, actively managed funds or stock picking will underperform broader market indices?
- If yes, go with a robo-advisor.
- If no, go with a self-directed discount brokerage firm (which would allow you to select stocks or actively managed mutual funds yourself).

If you answered two of the three questions a particular way, you might lean to that option, bearing in mind or subject to your overall "gut instinct", consideration for whether ancillary services would be used or not and cost.

Peter, this might be a great thread to "pin" for new forum readers interested in discount brokerages and/or robo-advisors to read first, without having to create a new thread and all of us having to re-answer the same question(s). 😉

Cheers,
Doug

AltaRed said
A fourth reason to go with a robo-advisor is that one is getting on in years and there is no one else to really take control of the DIY steering wheel once the person on point starts becoming incompetent.

A fifth reason may simply be that the time otherwise used to manage a DIY portfolio is better spent on other things such as career, family, or recreation.

FWIW, I somewhat disagree with reason 3. A robo-advisor uses index* ETFs in the portfolio and the only active management, to the extent one can call it active management, is re-balancing... and even then that is pre-determined depending on the computer algorithms. I'd separate robo-advisors from full service commissioned brokers and actively managed fund managers.

* the key point being broad index ETFs as compared to high(er) cost boutique ETFs trying to get cute on slice and dice. Apparently there is something like 640+ ETFs out there now. They are destroying the primary intent of the ETF concept.  

While I agree with you on your points, AltaRed, I think you misinterpreted what I was saying.

I didn't include the fourth & fifth reasons as they are broadly defined under the "first question/reason" and I wanted to simplify it into three, key points. Similarly, the wealth planning strategies and tax loss harvesting that robo-advisors have would be included within that "first question/reason".

How do you disagree with question #3? Robo-advisors typically only offer passive index ETFs so yes the only "active management" would be in changes to your strategic asset allocation or temporary over- or under-weights of specific asset classes relative to your Investment Policy Statement to which the robo-advisor has prepared for you. It's very much more targeted to "passive indexers" whereas self-directed discount brokerages are for both. 🙂

Cheers,
Doug