Full-Service Brokerages vs Robo-advisors: Understanding the key differences and benefits
Investing in the stock market can be an overwhelming experience, particularly if you're a novice investor. The advent of self-directed investing platforms has added to the confusion for many new investors, who often find themselves unsure whether to opt for a full-service brokerage or a robo-advisor to fulfill their investing requirements.
In this article, we'll explore the primary differences between full-service and robo-advisors, along with exploring the associated risks and benefits of each.
How do they work?
Full-service brokerages employ advisors who will meet with a client and design a customized portfolio based on their needs. They usually also offer additional services, like estate planning and taxes.
Robo-advisor clients normally complete a questionnaire outlining their needs and risk tolerance and the service will deliver algorithm-driven investment portfolios to align with them. The service is fully automated, regularly rebalancing to ensure the portfolio continues to perform within the client’s needs.
What are the costs?
Since the service provided by full-service brokers is more labour intensive, it naturally attracts higher fees, while the automated service provided by robo-advisors usually incurs lower charges. Full-service brokerages generally charge fees ranging from 1% to 2% of assets under management (AUM). In comparison, robo-advisor fees usually range from 0.25% to 0.5% of AUM.
Account options
Depending on your specific investment goals, Canadian investors can open a variety of accounts, such as RRSPs and TFSAs, among others. Full-service brokerages typically provide a wide array of these accounts, as do robo-advisors.
What type of investor are you?
Investors can be broadly categorized into two types: active and passive investors, and which type you are can help determine what the best option is for you when it comes to deciding what’s the best option for you.
Active investors actively manage their portfolios by frequently buying and selling securities in an attempt to outperform the market. Active investors typically rely on in-depth research, market analysis, and individual stock selection to identify investment opportunities.
Passive investing, on the other hand, involves a more hands-off approach. It aims to replicate the performance of a specific market index or asset class by constructing portfolios that closely resemble a predetermined benchmark.
Full-service brokerages can be more suitable for active investors, whilst robo-advisors are more tailored for those preferring passive investing.
Choosing the right option for you
Deciding which option is best for you is a personal choice. Whether you opt for a full-service or robo-advisor, it's crucial to understand their key differences.
If you're a new investor, take some time to consider your investment goals, account types, risk tolerance, and associated fees before making yours. No matter which approach you decide, you can embark on your stock market investment journey confidently, knowing your investments are being taken care of effectively.