Beware of 'Robo-advice'

Although most investors continue to work with human advisors, the rise of web-based investment platforms has made it more important than ever to understand the difference between 'robo-advisors' (Automated portfolio management services) and 'human advisors'.

Solutions Magazine has provided the following to help define the difference, and highlight the importance to maintaining 'human advice'.

How does “robo-advice” work?
Because these platforms don’t offer individualized advice, the term “robo-advisor,” although catchy, is a misnomer. It’s actually just software. When a client registers for a service, she or he answers a set of questions that determines a generic investor profile. The software then presents the client with choices of ready-made portfolios based on the profile. Because the profiles are formulaic – quite literally based on a mathematical formula – they can only account for a limited range of goals and risk tolerances. Robo-advisor software is designed to sort clients into broad categories and to serve those categories quickly and at a lower cost. This model relies on the investor answering the questionnaire accurately. It also places the responsibility of choosing the best portfolio on the client instead of the advisor, because there is no advisor.

The role of an advisor
Human advisors are licensed experts who create comprehensive financial plans designed to build wealth, minimize taxes and accomplish a diverse range of other goals. These may include everything from being able to afford next year’s vacation to buying a home to living comfortably in retirement. Because money is more than an account balance – it’s a family’s home, a child’s university tuition, an emergency fund for tough times – creating a plan requires understanding the emotional importance of each financial goal.

An advisor also does much more than portfolio rebalancing. She or he can help rearrange investments for tax efficiency, review budget and saving strategies, and put in place the right financial protection. As a result of understanding the full picture of a client’s life, a financial professional can handle varying degrees of complexity. If a client experiences major changes, plans can be adjusted to respond to the client’s new circumstances.

By the same token, if the economy changes, an advisor has the depth of knowledge to provide a proper analysis and plan of action. When faced with the decision of staying the course or making an adjustment, you can sit down with an expert intimately familiar with your investments. An advisor can evaluate what the decision will mean, not just for your portfolio, but for your long-term financial well-being.

Overall, the primary advantage of working with an advisor is nuanced “big picture” planning. Investing isn’t so much about buying a product; it’s about acquiring the component parts of a far-sighted strategy. Ideally, investments complement each other and click neatly into place within a financial plan. They’re allocated to generate growth or provide an income, to meet short- and long-term goals, to save taxes and to build a legacy. Furthermore, the plan must adapt – and the investments must be rebalanced – as the investor’s circumstances change. An advisor’s unique skill set supports the ability to translate a client’s vision into a concrete, achievable plan, where as a 'Robo-advisor' does not-to them you're just a number.

Health needs in retirement

Retirement is a milestone that many Canadians work towards for most of their lives. When preparing for that long- awaited goal of life after work, aside from ensuring you have enough savings to live comfortably, it’s also important to consider potential health care needs and costs.

Solutions For Financial Planning, lays out how to include health and dental benefits in your overall retirement plan. Longevity and wellness are top of mind for many Canadians, but we may be more prone to health issues as we age. Among Canadians aged 65 and older, almost 90 per cent have one or more chronic conditions, such as arthritis, osteoporosis or cardiovascular disease. These conditions may require everything from accessibility equipment to physiotherapy to nursing care.

Canadian seniors generally spend more on health care than younger Canadians. A 2014 survey found that households headed by a person aged 65 and over spent 6.1 per cent of their goods and services budget on health care, whereas households headed by someone under 30 spent 2.8 per cent. It may not come as a surprise to learn that prescription drugs are one of the largest health care expenses for Canadians over 65, accounting for almost 30 per cent of their out-of- pocket health spending. Those fortunate enough to enjoy group health benefits during their working years may not be fully aware of the true costs of health care.

Plan for expenses. Understanding potential health care needs is only one piece of the puzzle – knowing how you will pay for it all during your retirement years is another.

A beneficial first step is  determining whether your employer offers continued coverage for retirees. Then, if it applies to your situation, consider your spouse’s coverage – will it be enough for your needs, and how long will it be in effect? If your circumstances dictate shopping for a new plan, there are a range of options to consider. Some of the common health services covered are prescription drugs, hospital stays, nursing and home care, vision care, and medical equipment, as well as dental services such as exams, cleanings, llings and root canals. Look for plans that offer a variety of levels, enabling you to choose one that most closely aligns with your needs and budget. Many plans also offer coverage for spouses and children, add-ons such as travel insurance, and supplementary features like special rates for couples and families with multiple children. 

Be Proactive. Securing health and dental insurance ahead of retirement can be beneficial for a few reasons. Not only will this prevent a gap in coverage, but certain plans feature guaranteed acceptance and no medical questionnaire if you apply within a specific time a er your group plan ends. Throughout the process, your advisor is the person with the best expertise to help you understand the different plans available and to assist in deciding what options fit your needs. Having the right health care plan in place can help alleviate concerns about paying for future medical requirements and put more focus where it should be – on enjoying retirement to its fullest. 

Contact our offices today for more information on retirement planning.