What is a robo-advisor?

Robo-advice (also known as “digital advice”) and robo-advisors began to appear in Canada around 2015, slowly gaining popularity among investors. Robo-advisors aim to reduce fees and make investing easier, but there are still many who don’t know what they are or how they work. In this article, we’ll look at:

  • What is a robo-advisor?
  • How do robo-advisors work?
  • Advantages of robo-advice
  • Are robo-advisors safe?
  • Who should use a robo-advisor?
  • How can I get started with a robo-advisor?


What is a robo-advisor?

“Robo-advisor” refers to an automated technology platform or tool that helps investors build a portfolio online.

Robo-advisors usually require an investor to answer some questions about their financial goals, tolerance for risk, and investment time horizon. Then, based on the investor’s responses, the robo-advisor provides a portfolio of investments best suited to those goals.

If you had your own self-directed investments, through a discount brokerage like Qtrade Direct Investing, for example, you would deposit your funds and then purchase investments within your account(s). You would make the decision on how much to hold in stocks, bonds, mutual funds, exchange-traded funds (ETFs), etc.

In the case of a robo-advisor, a technology platform would automatically determine the allocation of your funds between various assets (usually ETFs or mutual funds) for you, based on your goals and risk tolerance.

Despite the term “robo-advisor”, there’s a real team of investment professionals behind the advice and portfolio construction, from portfolio managers and registered representatives to technology specialists. 

How do robo-advisors work?

When you open an account with a robo-advisor, you usually start with an interactive questionnaire that helps to match you with a well-diversified portfolio designed around your financial goals, risk tolerance, and investment time horizon. You deposit your money to your account and the robo-advisor automatically splits the amount into a variety of assets. As markets shift, your portfolio is automatically rebalanced whenever necessary to maintain your target asset mix. A robo-advisor will automatically keep your portfolio on track.

A robo-advisor portfolio can invest in a variety of different assets, but is usually focused in ETFs and mutual fund products. Through these underlying ETFs and mutual funds, a portfolio could invest in hundreds of companies worldwide, and depending on the portfolio, be diversified across geographies, industries and sectors as well. 

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Advantages of robo-advice

Cost effectiveness

In theory, as an alternative to mutual funds and self-directed brokerage accounts, investing with a robo-advisor can help you save money. Robo-advisors provide you with a target asset allocation mix and rebalance it as needed to keep you on track. There typically aren’t any transaction costs or trading fees with a robo-advisor, nor do you usually pay any sort of rebalancing fees. Rather, robo-advisors tend to charge a quarterly or annual fee based on your account balance. But fees vary quite widely – so make sure you check out provider fees before you invest.

Good for lower balances

Most robo-advisors will let you open an account with a very low balance, so you can have a diversified portfolio that is suited to your needs even with a small amount to invest. You can get investing for your future that much sooner. Note: Normally a robo-advisor won’t invest in a portfolio mix until you reach a minimum threshold (for example, in the case of Qtrade Guided Portfolios, a balance of $2,000 will trigger investment in a portfolio).

Automatic rebalancing

When you open your account, a robo-advisor provides you with a portfolio mix of ETFs that is based on your financial goals. As markets shift, robo-advisors will automatically rebalance your portfolio whenever required to keep your optimal asset mix. Automatic asset allocation is included. And if your needs change over time, you simply update your questionnaire responses, and the robo-advisor will reallocate the assets according to your new circumstances.

Portfolio diversification

A single ETF or a mutual fund is already a diversified investment that holds a basket of assets. A portfolio designed by a robo-advisor is further diversified, investing in a basket of ETFs or mutual funds. If you were to invest in each of the underlying securities yourself in a brokerage account, you might hold hundreds of assets. A robo-advisor portfolio allows you to diversify your investments in one single holding.

Want to find out more about online investing?
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Are robo-advisors safe?

Canadian robo-advisor accounts are usually protected by the Canadian Investor Protection Fund (CIPF), which protects the assets and cash you have invested (up to $1 million) in case of the bankruptcy of a member firm.

In addition, most of the firms that provide robo-advice are members of the Canadian Investment Regulatory Organization (CIRO), which provides another layer of regulatory oversight. In Canada, regulation of the securities industry (including robo-advisors) is carried out by provincial securities commissions and self-regulatory organizations (SROs), which includes CIRO. CIRO monitors client complaints and disciplinary matters to proactively identify emerging regulatory issues at member firms.

Who should use a robo-advisor?

Robo-advice isn’t just for new investors or those with lower cash balances. It’s a good investing option for anyone who doesn’t want to pick securities on their own, regardless of their income or investment experience. Fee-conscious investors may also see the appeal of robo-advisors. While fees vary significantly by robo-advisor, they’re usually lower than purchasing mutual funds or ETFs by yourself.

A robo-advisor may not be appropriate for investors who:

  • are investing for the short term
  • have more complex account needs (an estate, corporation, etc.)
  • want to invest in individual stocks, bonds, ETFs or other securities
  • need more personalized support (as robo-advice is almost exclusively online)

How can I get started with a robo-advisor?

You can get started with a robo-advisor account very quickly. Once you’ve decided on a provider, all it takes is completing an online questionnaire about your financial knowledge, your goals, your risk tolerance and your investment time horizon. You deposit money to your new account, and it will be invested in your optimal portfolio asset mix based on your questionnaire. You can set it and forget it.

Qtrade offers robo-advice through Qtrade Guided Portfolios, automated investing with a human touch. It uses the latest financial technology to deliver an easy and convenient online investing experience, but your portfolio design, investment oversight and customer support are all handled by experienced investment professionals committed to seeing you reach your goals.

Qtrade Guided Portfolios are optimized to deliver performance that is as consistent as possible while controlling risk. Over time, the performance of different investments will cause the asset allocations in a portfolio to shift from their targets. However, the underlying investments in Qtrade Guided Portfolios are continually monitored and rebalanced whenever they shift away from their target mix.

If you’re interested in investing according to your values, Qtrade Guided Portfolios also come with responsible investing (RI) options. RI incorporates an analysis of a company’s environmental, social and governance (ESG) performance into the investment decision-making process. It enables fund managers to create investment portfolios that provide sustainable value and reduced risk.

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Qtrade Guided Portfolios is a trade name of Credential Qtrade Securities Inc.