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What to Expect From a Robo-Advisor

Until recently, 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 are key advantages

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 the traditional advice channel.

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 robos 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, the model portfolios are made up of MD mutual funds, which are actively managed.

For example, the MD Precision Balanced Income Portfolio™ is made up of nine MD mutual funds. Each of these funds has professional portfolio managers who select stocks or bonds based on proprietary research provided by their analysts. These portfolios give investors the opportunity to generate additional performance through security selection.

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

Robos 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 as well as 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.

MD focuses on quality, service and low cost

Through our MD Financial Suite, MD offers investing services for a variety of preferences: online brokerage through MD Direct TradeTM; low-cost, simple online investing through MD ExO® Direct; and comprehensive investment and financial planning through the MD PlusTMaccount and MD Private Investment Counsel. We know the world is changing, and we’ve changed, too. We are available to help you choose the services that best suit your needs.