Robo-Advising vs DIY Investing
Do you prefer to hem your own pants or visit a tailor? Fix your own shower or hire a plumber? Diagnose your own flu or book an appointment with a doctor? What you choose to do yourself and what you prefer to trust to an expert depends on your comfort and experience with the activity. Take investing: some people choose to manage their own portfolios, while others prefer to leave it to financial experts. Understanding how robo-advisors compare with do-it-yourself (DIY) investing can help you decide which approach you’re most comfortable with.
Putting together a portfolio
When you take a DIY approach to investing, you decide for yourself what financial assets to include in your portfolio. You’ll have to calculate how much risk you want to take, analyze which stocks, bonds, mutual funds or exchange-traded funds (ETFs) will do well, and buy the right combination of them to match your risk objectives.
Robo-advisors like RBC InvestEase can be a great option for folks who want to invest but don’t know where to start. When you first go onto the RBC InvestEase website, we’ll ask you a few questions to determine how much risk is appropriate for you as an investor. After we determine how much risk is right for you, we’ll invest your funds in a portfolio of low-cost ETFs that has the right mix of equities, fixed income and cash to match your risk profile. Our team of Portfolio Advisors then reviews the recommended portfolio to make sure it’s appropriate for you and your objectives. Here are more details on how RBC InvestEase works.
When financial market conditions change, your portfolio may drift so that your investments no longer align with the amount of risk you’re comfortable with. For example, if equity markets do well your portfolio might be up (which is great!), but you may also hold more equities than is appropriate for your risk profile.
With a DIY portfolio, you’ll have to monitor your portfolio, and decide which investments to buy or sell if financial market conditions cause your asset mix to drift outside of the amount of risk you’re comfortable with. With robo-advisors, rebalancing is automated and you don’t have to think about it. The RBC InvestEase team continuously monitors your portfolio to make sure it’s aligned with your objectives. If your asset mix gets out of whack we’ll buy or sell ETFs to bring your portfolio back in line with your goal.
Thinking through fees
There’s a cost to investing no matter how you do it. DIY investment platforms typically charge two fees: a maintenance fee for holding your account (usually a flat fee charged quarterly or annually), and commission fee every time you trade (a fee charged whenever you buy or sell a financial asset).
Robo-advisors usually charge an annual management fee on your account balance. RBC InvestEase charges an annual management fee of 0.50% (article: Here's Our Catch on Fees). To put that in perspective on a $1,000 account our management fee would be $5 a year, or about $0.42 a month.
If you own mutual funds or ETFs – whether you buy them on a DIY platform or through a robo-advisor – you’ll pay a management expense ratio (MER) to the mutual fund provider. The MER covers the management fee, operating expenses and taxes of the fund itself. MERs can vary widely among funds, so they’re important to consider. The RBC InvestEase portfolios are made up of low-cost ETFs, with the weighted-average MER for each portfolio ranging from 0.11% to 0.23%.
Deciding how to decide
We may want to believe that we’re rational thinkers who make optimal decisions based on all the available information, but the truth is that this isn’t usually the case. Many psychologists have demonstrated that when people are faced with complex decision-making they lean on predispositions (or biases) to simplify their choices. For example, when deciding where to go for dinner do you:
- a) Analyze every menu and online review for all the restaurants in your city; or
- b) Think “I feel like Greek food and this Greek place is close and a friend said it was good”
Choosing option b) is the perfectly normal thing to do. The thing is, cognitive shortcuts can lead to suboptimal outcomes when it comes to investments.
For example, folks tend to look for and notice information that confirms their existing beliefs, and ignore or undervalue information that contradicts their beliefs (this is known as confirmation bias). In an investment context, they may only consider the positive information about an investment, and ignore any negative information. Also, we prefer avoiding losses as opposed to achieving gains. Loss aversion can lead investors to hold onto losing positions even if an investment has little or no chance of going back up. These are examples of just two of many types of biases that can influence investment decision making.
Behavioural biases can be particularly pernicious for DIY investors, who have to make their own investment decisions. At RBC InvestEase the decision making is automated: our smart technology recommends a personalized investment portfolio, and rebalances it on an ongoing basis as market conditions change.
Accessing professional advice
The “robo” in robo-advisor really means all the underlying technology used to help manage your account. At RBC InvestEase you always have access to real people for the support and advice you need. Have a question about the difference between a TFSA and an RRSP? Need help thinking through your financial goals? Want to better understand what’s happening in the financial markets? You can easily contact our team of experts by phone, email or chat at any time. Leave all the investing homework to us!
Bottom line, it’s up to you! If you are an experienced investor and prefer to make your own decisions, DIY investing may be the right choice for you. If you want the convenience of an online investment portfolio that’s managed by a team of accredited portfolio managers, a robo-advisor like RBC InvestEase is a great option.