What’s a Robo Advisor?

Even if you don’t read the financial section of your newspaper every day, you’ve probably heard the term “Robo Advisor” already. You may even be wondering if you should have one yourself. But what is a Robo Advisor, exactly?

How robo advisors work?

A robo advisor is an automated online portfolio management service that invests on behalf of an investor. Robo advisors provide investors with an entry-level approach to passive investing. Through a series of survey questions a robo advisor gathers data on an investor’s preferences and then automatically invests in a strategy catered to their goals.

The history of robo advisors

The term Robo Advisor was first used by Investment Advisors to describe investing services with no client interaction, as if robots were running everything. It now refers to an online investment service that uses software to help manage and rebalance their clients’ investment portfolios. The software these services were based on was already being used by professional financial managers to automate some of their work at the time. But the idea of making that software available online, to individual investors, was new.

By 2012, the term Robo Advisor was in common use in the media. It was a catchy way to refer to a relatively new service category – it made it sound like investing was run by robots and artificial intelligence – and it stuck. But like any catchphrase, it doesn’t quite tell the whole story.

The benefits of robo advisors

Robo advisors provide investors with a hands-off approach to investing by removing the decision-making and strategy. This makes using a robo advisor ideal for new investors as algorithms determine the ideal investment strategy. A robo advisor is also low-risk as it practices diversified and balanced investing.

The importance of robo advisors in Canada

Online portfolio management services using cost-effective ETFs  became available in Canada in 2014. ^{footnote 11} And with the introduction of SmartFolio in 2016, BMO became the first major Canadian bank to launch one. The regulations governing these services in Canada are slightly different than in the U.S., however. One significant difference is that the rules here are “technology neutral.” ^{footnote 22}

Put another way, in order to be approved to carry on business in Canada, an online investment management service can’t be entirely automated. An advisor must always be involved in decision-making. The online and automated aspects are just part of the service, making it more efficient and, typically, less expensive. These services also have to make sure your investments are suited to your needs and objectives, the same way an Advisor has to “Know [Their] Client.”