Fees and taxes with robo-advisors

Finance  · 

I recently asked my friend “Why do you invest using robo-advisors?”

“Because it’s 2018.”

Beep. Wrong answer.

Fluff phrases like that could get you elected but you ought to have stronger reasons than that when it comes to your own money.

Robo-advisors are definitely the rage right now in Canada. Based on stats from late 2017, nearly 5% of AUM in Canada is now being done by robots. And it is not just millennials getting in on this. WealthSimple alone manages CAD 2 bn+. The average age among the 14 robo-advisers in the Canadian marketplace is about 44 years old as of late 2017.

I am not going to get into what a robo-advisor is or what are the different options available since there are many articles out there for that. I have linked them below.

Full disclosure: I am not in the finance industry and have no relationships with any advisors. However, I have some money being managed in WealthSimple and WealthBar.

There are 2 drawbacks that some (if not all) robo-advisors have which can be avoided if you were managing the money yourself or had an advisor do it for you.

Capital gains tax and tax loss harvesting

When you own an ETF that has gone down in value from when you purchased it, you can sell it so as to claim capital losses. And you are legally allowed to buy something similar (but not too similar). So in a way for you, it still looks like you own that ETF but now you also have capital losses that you can use to offset capital gains taxes.

Now, if you are a DIY investor, you could just do this, obviously with a bit of research. I am not saying none of the robo-advisors do this but a fair number don’t.

Note, this applies only to your non registered accounts. So doing this inside your TFSA or RRSP is pointless. Which is why I only have my registered accounts being managed by a robo-advisor.

Dividends from American companies taxed inside TFSAb>

As a Canadian, when you own a stock of an American company that pays dividends, you are taxed 15% of those dividends. Meaning, if you purchased 1 stock of company A, any time A pays you a dividend of say 100 USD, you would just get 85 USD.

Now, that’s a hell lot of money that is going to Uncle Sam’s coffers which could have been re-invested and further compound your investment.

This happens in both your non-registered accounts and TFSA. Because of a tax treaty between US and Canada, the RRSP is exempt from this tax on dividends. Why can’t the US also exempt the TFSA from these taxes is beyond my comprehension but I digress.

Now, I saw this happen inside my WealthSimple account. Looking at the Activity section, I noticed taxes being debited from my TFSA investment account. Speaking to them, I found out that it was the 15% dividend taxes.

If I have both TFSA and RRSP with them, how hard is it for this “digital-first company built on technology” to add in a factor to their algorithm powering the allocation to ensure that dividend paying American companies are purchased only inside my RRSP.

I am pretty confident most of the other robo-advisors don’t do this as well.

…

To conclude, this is not a rant against robo-advisors. They sure do have a lot of things going for them and I do see the value in them. But you must take everything with a grain of salt. It is not a black box. Login to your account and look at the recent activity. See what fees/taxes/withdrawals are debited from your account, what holdings are in your portfolio. Don’t give them a free run.

With a marketing budget that some of these robo-advisors have, it’s not surprising that people are flocking to them in droves.

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