Proponents of robo-advisors say their main advantage is lower fees due to increased efficiencies from the technology. They claim this can add hundreds of thousands of dollars to your investments over time.

But is that true?

I decided to do my own analysis of the impact fees can have on an average person’s retirement savings.


I decided to look at two 50-year-olds planning to retire at age 65. I assumed a net 6% rate of return to represent the robo-advisor and a net 5% rate of return to represent the human advisor (I deducted 1% to compensate the human for her advice).

My typical couple each earn $100,000 per year and each have $150,000 in RRSPs and $35,000 in their TFSAs. Both contribute $350/month to RRSPs and $2,000/year to TFSAs. In addition to their investments, they have a home worth $500,000 with a $185,000 mortgage and $10,000 in credit card debt from a kitchen renovation.

The robo-advisor results

When I ran the numbers for the robo-advisor at 6%, our typical couple would have a little less than $1.2 million in TFSA and RRSP investments when they retired. This, along with CPP and OAS, would give them an after-tax income of $106,000 ($73,200 in today’s dollars) from age 65 to age 95, indexed at 2.5% inflation.

Comparing that to a human advisor at 5%, our couple would only have $1,047,000, which would provide an income of $95,000 — 10% less than the robo-advisor. This represents close to $500,000 of lost income by age 95.

So, on the surface, the claim that investment fees can cost you hundreds of thousands of dollars seems true, except for what is missing in my analysis. Since the human advisor charged 1% for advice, to get a fair comparison I need to incorporate that advice.

Read: 4 ways to compete with robo-advisors

The human advisor’s advice

First, the human advisor pointed out to our couple that their marginal tax rate now was higher than their projected marginal tax rate in retirement, so contributing to their RRSP instead of their TFSA would produce better after-tax results. So, the first recommendation was to take $14,000 from each TFSA and contribute it to RRSP. This would create a $10,000 tax refund that could then be used to pay off the high-interest credit card debt, saving hundreds each year in interest.

Next, our human advisor recommended that our couple take the $500 they’d budgeted each month for the credit card payment and contribute that to their RRSPs along with the $2,000 they each had been contributing to their TFSAs annually.

Read: Robo-advisor offering responsible investment portfolios

The third recommendation was to increase the amount they intended to save each year to account for inflation, a painless way to increase wealth over time.

The next recommendation was to use the annual tax savings from RRSP contributions to make lump-sum payments on their mortgage. This would reduce their mortgage amortization from 12 years to eight years. With the mortgage paid off four years sooner, our human advisor recommended that money set aside for the mortgage payment be used to increase annual RRSP contributions.

For the final recommendation, the human advisor suggested that when the mortgage is paid off, the couple could use the tax savings from RRSP contributions to make TFSA contributions. This would allow for a larger sum of tax-paid savings that could be used for reasons other than income in retirement, offering peace of mind and flexibility.

The human advisor results

Did the 1% fee paid to the human advisor offer good value?

When I ran the numbers a second time for the advice given, our couple was now projected to have more than $1.6 million in TFSA and RRSP investments when they retired. This is an increase of over $400,000, or 35%, when compared to a 1% higher investment return without the advice of the human advisor.

Assuming our couple spends the same $106,000 after-tax each year in retirement, at age 95 when the robo-advisor plan runs out of money, the human advisor plan still has more than $960,000 in investment assets.

The bottom line

Fees matter, but so does advice. In the human advisor analysis, I calculated that an investment return of only 4.3% would provide the same results as the robo-advisor at a 6% return. In this case, the value of the advice is equivalent to a 1.7% return. Does this mean that every advisor adds 1.7% return? Not necessarily.

Financial advisors can and do add value — how much depends on the client’s situation, their willingness to implement the recommendations, and, of course, the quality of the advice. Reducing fees using technology also adds value and for sophisticated, well-educated investors, robo-advisors can also represent good value.

Read: 4 ways robo-advisors humanize automated tools

For the vast majority of Canadians, however, no technology can replace the education, advice and coaching that professional advisors can give to their clients. Sure, there’s probably a fintech company working hard to try and change that. But in the meantime, clients still need advisors.

Dave Faulkner, CLU, CFP, is CEO of Razor Logic Systems Inc., and creator of RazorPlan Financial Planning Software.