Dispelling the myths of robo-advisors: the role of advice and fees on investment success
By Jared Kadziolka, CFA, CFP® 30 April 2021 4 min read
By now you’ve likely seen ads on television that suggest working with a financial advisor is something of the past and that the best path to investment success is through low-fee investments offered by an online robo-advisor. The messaging is blunt and suggests that an investor will be able to retire either sooner or richer by simply making a switch. Although fees do factor into portfolio performance, should they really be the sole consideration when making an investment decision? Let’s take a closer look.
What are robo-advisors?
At their core, robo-advisors represent an online investment platform that provides automated financial planning and investment services with limited human interaction. Typically, computer algorithms use client data collected from online questionnaires to make recommendations and set up the client’s investment plan. The recommended investment portfolio—which is managed automatically—will usually consist of low-cost exchange traded funds (ETFs) that aim to provide the client with the desired risk and return characteristics.
It’s worth noting that Canadian robo-advisors may come with more human support and interaction than their U.S. counterparts. In most cases, however, this additional “human touch” only becomes available at certain invested dollar thresholds and would typically involve less personalization than that which would be expected with an actual human advisor.
Does a lower cost portfolio equal higher returns?
Not necessarily. Although fees associated with a portfolio inherently reduce an investor’s returns, the performance of the underlying portfolio is still the most important element. Many factors besides fees can impact portfolio returns; including the asset mix, risk management, and investment strategy. In looking at return figures gathered from two prominent robo-advisor firms, low fees alone do not appear to guarantee higher returns.
The chart below illustrates historical returns of three balanced portfolios with a similar asset mix of stocks and bonds. Presumably, these portfolios would also carry similar risk profiles and long-term growth prospects. The two robo-advisor portfolios are compared to ATB Investment Management’s Compass Balanced Portfolio series A. The returns for all portfolios are presented after fees have been paid.
Balanced Portfolios - Net Performance, as of December 31, 2020
Despite the higher fees of the Compass Balanced Portfolio, the net performance still compared favorably to the ETF portfolios over each of the time periods. This suggests that cheaper fees do not guarantee greater returns and, perhaps, in working with an advisor, an investor may still be able to retire sooner and richer despite marketing to the contrary. We can see that fees alone don’t always tell the full story.
Performance aside, ATB Wealth clients also have access to financial expertise through their dedicated financial advisor as part of the fees they pay. Trusted advice like this can go a long way in helping them reach their goals.
Advertisements from robo-advisors such as Questrade like to simply equate fee savings to greater investment performance—a generalized claim which we’ve debunked above. Though investment performance is important, it’s only part of the equation that leads to investor success.
We believe that the success of an investor is best measured by their ability to reach their unique financial goals. To do so, an investor needs to have a well-constructed portfolio providing adequate returns, but they also need to practise good investment behaviours. Such behaviours can be developed and bolstered by working with an advisor.
The value of advice
The value that advisors contribute to their clients’ investment success may be less quantifiable than investment returns or fees, but it is no less important. A trusted advisor will help ensure their clients have financial plans built around their goals and circumstances in order to provide them with the best chance of success.
Once such a roadmap is laid out, clients also benefit from the ongoing education, guidance, and accountability that working with a trusted partner can bring. This can help clients gain a better understanding of their relationship with money and the normal human emotions and behaviors which may get in their way.
An advisor can help by challenging clients when they may not be making decisions in their best financial interests, such as chasing returns of speculative investments or looking to make significant changes during a period of market volatility. Such support allows clients to feel more confident and avoid the investment pitfalls that can derail their success.
Below are some statistics from the 2020 Canadian Mutual Fund Investor Survey1 that support the notion that most clients feel their advisors are valuable partners.
84% of mutual fund investors are either satisfied or very satisfied with the advice given by their advisor.
90% of mutual fund investors agree that the advice they get from their advisor is worth the fees—an increase of 5% from 2019.
82% of mutual fund investors say that they have better saving and investment habits because of their advisor.
In addition, a research study by the Canadian non-profit organization, Cirano, suggests that Canadians who work with an advisor accumulate significantly more in savings than comparable investors without advice.
We can appreciate that robo-advisors can be a good fit for some investors and that they have contributed to making investing even more accessible. Robo-advisor firms also benefit investors by providing an alternative that puts pressure on poor-quality portfolio managers and unattentive advisors in the industry. That said, better returns and greater investment success should not be expected by simply switching to a robo-advisor. As we’ve seen, well constructed portfolios with higher fees can easily compete with, and even outperform, low-cost ETF portfolios. When such portfolios include the benefits of having personalized advice from a trusted advisor—with whom a deep and understanding relationship has been forged—most clients will have no reason to consider a switch.
This document and all of the content has been compiled by ATB Investment Management Inc. ("ATBIM”) which manages the Compass Portfolios and ATBIS Pool funds. ATBIM, ATB Securities Inc. ("ATBSI", Member Of IIROC & CIPF), and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and are licensed users of the registered trademark for ATB Wealth.
The mutual fund performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Unit values of mutual funds will fluctuate and past performance may not be repeated. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATB Securities Inc., ATB Investment Management Inc., ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read fund disclosure documents before investing. The Compass Portfolios includes investments in other mutual funds. Information on these mutual funds, including the prospectus, is available on the internet at www.sedar.com.
Opinions, estimates, and projections contained herein are subject to change without notice, and ATBIM does not undertake to provide updated information should a change occur. The information in this document has been compiled or arrived at from sources believed reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. ATBFinancial, ATBIM and ATBSI do not accept any liability whatsoever for any losses arising from the use of this report or its contents. The material in this document is not, and should not be construed as an offer to sell or a solicitation of an offer to buy any investment. This document may not be reproduced in whole or in part; referred to in any manner whatsoever; nor may the information, opinions, and conclusions contained herein be referred to without the prior written consent of ATBIM.