Sunday, February 23

Self-Directed Investing vs. Robo-Advisor

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When it comes to investing in the stock market, there are now more choices than ever. You do not have to go with the products are your primary bank, nor do you have to go with a bank at all. You can take your portfolio into your own hands, but exactly how much you want to manage yourself is also up to you. This is where most people get hung up on whether to choose self-directed investing vs. robo-advisor.

Self-directed investing can be the lowest cost option, but depending on your investing-savvy can mean more risk. A robo-advisor can cost a little more, but it takes the burden of managing investments yourself off your shoulders. Depending on your investment style, you can choose one or both to manage your money.

Here is how a self-directed investing vs. robo-advisor approach compare!

What is a robo-advisor?

The name can be misleading, but a robo-advisor is not actually a robot. Behind every robo-advisor in Canada there are actual people. The term “robo” is only there to emphasize that the investment is happening on autopilot for the investor (that’s you).

This is important to understand because it means that robo-advisor accounts are actually actively managed funds. People generally characterize them as a form of “passive” investing, but this is incorrect. They are more closely related to other actively managed funds, like mutual funds, except considerably cheaper. However, this also means that the portfolio allocations can and do change over time. This means the portfolio you initially set up with the robo-advisor may not be the same portfolio you have in a few months or years. This isn’t a bad thing! The stock market is always changing, and the fund manager is making changes to the portfolio to ensure you stay invested according to your risk tolerance and financial goals.

The low fees associated with robo-advisors are one of the reasons these are such great tools. Where a mutual fund can cost you as much 3% to even 5% in management fees, a robo-advisor like Wealthsimple will let you invest for as little as 0.4% to 0.5%. However, this is still more expensive than investing on your own. DIY or self-directed investing with ETFs can cut your fees even further. ETF fees can be as low as 0.1%, but you have to do all the investing yourself.

An account with a robo-advisor can be a tax-advantaged account like an RRSP, TFSA, or RESP (Canada) or a 401K or RothIRA (USA).

When to choose a robo-advisor

A robo-advisor can be a great addition to your financial plan, regardless of your investing knowledge.

If you’re a brand-new investor that doesn’t understand much about the stock market, a robo-advisor is the perfect place to start. By signing up with a robo-advisor, you will have the opportunity to learn and gain experience in the market. Not only will you become familiar with investing terms like “ETF” or “dividends”, you’ll also get the chance to watch your balance fluctuate as the market goes up and down.

Robo-advisors are perfect for people who want to invest, but are not interested in learning the intricacies of creating or managing and investment portfolio. If you don’t have the time or the desire to research investments, a robo-advisor is perfect for you!

If you’re a more seasoned investor, you might still choose to make use of a robo-advisor. There is no rule that says you must invest all your money only one way. In fact, it might actually make more sense to split your funds between a robo-advisor and a DIY portfolio. This can give you the security of having someone else manage a portfolio for you, while still giving you your own money to play the market with.

How you choose to split your savings between a self-directed investing vs. robo-advisor depends on your goals and investor confidence. The less familiar you are with the stock market, the more you should rely on a robo-advisor.

What is DIY or self-directed investing?

Managing your own investment portfolio is often referred to as self-directed or “DIY” investing. In this scenario, you are solely responsible for selecting and managing the assets you invest in. You have to do the research, make the decisions, and execute the actual trades. You will need to manage investment losses, minimize taxes, and more.

RELATED: How to Build a Six-Figure Stock Portfolio from Scratch

To start a self-directed investment portfolio, you need to open a brokerage account. This is different from a bank account, though many big banks offer brokerage accounts. A brokerage account lets you “broker” (aka. trade) securities like stocks and ETFs.

A brokerage account can be a tax-advantaged account like an RRSP, TFSA, or RESP (Canada) or a 401K or RothIRA (USA). It’s as simple as selecting the account when you sign up.

When to choose self-directed investing

A self-directed investment portfolio is perfect for more seasoned investors who have made an investment in the knowledge of how the stock market works. They are comfortable choosing investments and executing trades. They understand how to minimize fees and taxes, so they can keep costs low.

The benefits of self-directed investing are more control over your investments, which means both lower fees and the potential for higher returns.

If you’re nervous about creating your portfolio, one trick you can use is to recreate a robo-advisor portfolio. Most robo-advisors are transparent about how and where they invest their clients’ money. They even get specific as to exactly what ETFs they select! You can copy their exact portfolio allocations shared on their websites without paying their fees. The only hook is that you have to keep up with changes and minimize taxes.

Self-Directed Investing vs. Robo-Advisor Comparison

Here is a side-by-side comparison of DIY investing and robo-advisors to give you an idea of their differences, as well as the perks and pitfalls of each:

The most important thing is choosing whichever is best for you!

The only mistake you can really make is not investing at all

The best time to get started in the stock market is 8 years ago, but the second best time is right now. The sooner you get started investing, the more time you have to learn how the stock market works and the longer your money has to grow.

When it comes to selecting self-directed investing vs. robo-advisor, remember that it’s ok to change your mind. You’re allowed to start off with one, and if it turns out not to be the right fit, move your money to the other! Sometimes the only way to learn what kind of investor you are is to become an investor. Stop procrastinating your financial security, and get started investing today!

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

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