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Investing with a robo advisor: What to expect

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For a long time, investors had a choice between complete service and no service: they could work with a financial advisor or be a do-it-yourselfer and invest with an online brokerage account. Now, robo advisors aim for a middle ground, costing less than full-service advice but offering more service than a discount broker. Marketing for this type of service often targets younger investors, promoting ease-of-use and the appeal of doing everything online.

Accessing a website or app is the first step

Unlike the experience of working with a real-life human advisor, using robo-advice means going to a website or using a mobile app. Robo advisors get you started with multiple-choice questions about your investment goals, time horizon and tolerance for investment risk.

Your responses feed into an algorithm that determines your asset mix — that is, your investment allocation to a mix of stocks, bonds, cash equivalents and, in some cases, alternatives such as real estate investment trusts. The more aggressive mixes have higher proportions of stocks, while the more conservative ones have higher weightings of bonds.

Simplicity and low costs using ETFs

Robo advisors provide a simple path to diversification. They are not concerned about the prospects of an individual company or sector — they want to give investors broad market exposure. As a result, many robos use exchange-traded funds (ETFs), which are funds that attempt to track the performance of a stock or bond index.

For example, one large ETF in Canada provides access to 99% of the investable U.S. stock market through 3,700 large-, mid- and small-cap stocks. In turn, this ETF makes up a portion of one of the portfolios on offer from a popular Canadian robo advisor. These are inexpensive ingredients, with some index ETFs available to Canadians at an annual fee of 0.25% or less.

The robo advisor’s fee for assembling these ETFs and rebalancing portfolios may add to the overall fee, but even at the higher end of the range, the cost would still be less than half of what Canadians pay through traditional advice channels.

While robos ensure that investors are broadly diversified, they limit choice. They will offer between five and 10 model portfolios. And they don’t let investors fine-tune their mix by allocating extra to a particular region or sector, such as emerging-market equities or corporate bonds. It’s a bit like a pre-made salad: it’s a convenient choice, but the ingredients can’t be customized.

Some robo advisors use mutual funds

Although robo advisors often use ETFs, there are differences within this group. Some focus solely on broad, index-based ETFs, while others also add more specialized ETFs, using filters to select stocks from the index based on certain criteria.

In the case of MD Financial Management’s MD ExO® Direct, you can choose either actively managed funds or index replication strategies. Both use tactical portfolio rebalancing, as MD believes this approach will provide an opportunity for improved investment performance.

Over time, asset mix may change on its own, as some asset classes grow more quickly than others. The robo advisor will rebalance your holdings so they remain aligned with the model portfolio.

Robo advisors try to make the online experience personal

In addition to their focus on portfolios rather than on individual securities, robo advisors differ from discount brokers in that they offer some investment advice. MD ExO Direct has an online chat feature to answer investment questions and a phone number that investors can call for advice.

This is not the same as getting comprehensive financial advice from a dedicated advisor, but if your focus is on low-cost investing and a simplified experience, it is definitely a helpful feature.

Choosing the investment strategy that’s right for you

Whether you’re a physician, your partner is a physician, or maybe you’re both physicians, we know that your household is different from other Canadian professional households. The right financial planning strategy is one that’s based on the intricacies of your career in medicine, your personal circumstances, and the current environment. MD ExO Direct offers simplified investing that is entirely automated and online, while still providing access to an MD ExO Direct advisory team when you need it.

If you prefer to work face-to-face with an MD Advisor* or to trade online on your own — we’ve got you covered too. 

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.