Meeting the robo-advisor challenge

The tide of robo-advisors entering the marketplace hasn’t hit most Canadian advisors’ radar just yet, says Dan Richards, CEO of Clientinsights in Toronto. But, he adds, “Advisors will soon take notice, as we are going to be seeing significant launches of robo-advisors in the next 12 months in Canada.”

For an advisor who offers only investment planning or is heavily focused on the top end of his/her book, this could mean trouble, Richards says. Some clients might shop around, which could lead to downward pressure on advisors’ fees.

“Where advisors are more insulated is when they are providing more comprehensive advice,” Richards says, “[such as] when they are getting into tax considerations and customizing portfolios based on client circumstances or specific investment products.”

The rise of robo-advisors should be seen as an opportunity for advisors to assess their overall practice and value proposition, Richards says, rather than being viewed as a pernicious development. Advisors should look to complement their clients’ investment portfolios with the help of an online portfolio manager.

The term robo-advisor originates from “robo,” meaning automated, and “advisor,” which suggests that there is an element of financial advice being provided, says Bruce Seago, president of Toronto-based ShareOwner Investments Inc., one of the first robo-advisors to enter the Canadian marketplace, having launched three months ago.

Other Canadian robo- advisors include Toronto-based Nest Wealth Asset Management Inc. and Vancouver-based WealthBar Financial Services Inc.

“There has been a lot of focus in the Canadian marketplace on the active investing strategy,” Seago says. “And for those who want a passive, well-diversified portfolio, there hasn’t been a lot of innovation in that space in Canada.”

Many online providers cringe at the term robo-advisor, as it implies a technology that is devoid of any human interaction.

“Part of the benefit of this service is the high degree of automation for clients,” Seago says. “But the implication that it is entirely automated just isn’t true.”

Robo-advisor platforms provide clients with an online risk- assessment tool that calculates an appropriate asset allocation based on age, financial goals and risk tolerance. Clients then receive a recommended portfolio of funds, built by using index-based, exchange-traded funds (ETFs) predominately.

But unlike a discount brokerage, robo-advisors assign clients a dedicated, licensed representative. Depending on the provider, this could be a licensed portfolio manager or an investment counsellor.

These representatives can be contacted by telephone and, in some cases, via text messaging, email and video conferencing. Reps also contact clients annually to reassess each client’s financial situation and risk tolerance.

Another major difference between robo-advisors and discount brokerages is that clients of robo-advisors receive automatic rebalancing of their portfolios.

Robo-advisors’ clients pay fees that are slightly higher than those charged by a discount brokerage but only a fraction of the cost clients would pay an investment advisor to provide the same service.

The majority of robo-advisors charge management fees of 0.25%-0.60%, depending on the client’s asset level, plus the fee of the underlying ETF.

“We wanted to build a system that would keep more money in the investor’s pocket,” says Randy Cass, founder of Nest Wealth, which operates only in Ontario but is looking to expand across Canada in 2015. “We wanted to build a system that we thought was equitable.”

The minimum amount to open an online account with a robo- advisor ranges between $5,000 and $25,000, much lower than what the average advisor is targeting, says Michael Katchen, founder and CEO of Wealthsimple: “This is a big problem in the industry today, in that unless you have a lot of dough, you can’t get access to great advice. A client could have $400,000 and still not meet the minimum for a lot of advisors. With our platform, we can serve the $5,000 investor just as well as the $5-million investor.”

For Seago, the advisory business is, in effect, providing clients for his business, as some financial advisors are either being forced or are choosing to let go of the lower ranks of clients in their books.

“We are seeing a lot of interest from clients who are, effectively, being let go due to account minimums,” says Seago. “Clients with accounts in the $300,000-$400,000 range are approaching us because they now have the opportunity to explore services that will keep them in a well-diversified portfolio but not have to go it alone – and all at a much lower cost than they have historically been paying.”

Although robo-advisor sites still are in their infancy in the Canadian marketplace, these websites have been growing steadily in the U.S. over the past several years. One of the largest is Palo Alto, Calif.- based Wealthfront Inc. In little more than two years, that company has surpassed US$1.4 billion in assets under administration (AUA), having added more than $100 million in AUA per month this year.

In Canada, the business model has been slower to take off. But now, with the imposition of Phase 2 of the client relationship model (CRM2), the advisory business is facing a high level of scrutiny regarding fees and transparency. Thus, the timing is beneficial for robo-advisor businesses.

“We didn’t plan to launch at the same time as CRM2; that was just an added bonus. And we are really excited about it,” Katchen says. “We believe this is a great thing for the industry, and we want to do everything we can to push transparency and provide lower fees for investors. That is what we stand for.”

The Wealthsimple offering doesn’t just opt for the least expensive ETFs, Canavan says. Rather, the company looks to build a portfolio in a way that’s similar to the manner in which pension funds are assembled.

“I think we are going to get some small pension funds taking a look at this solution,” says Canavan. “And as we grow, we will start to offer this solution to charitable foundations, so they will be able to do their investment portfolios at a very low cost.”

Wealthsimple doesn’t want to compete with financial advisors for clients, says Canavan, who once ran Toronto-based Assante Wealth Management (Canada) Ltd. and knows a thing or two about the advisory business. Rather, Wealthsimple wants to be seen as a complementary tool.

“We don’t want to replace the advisor necessarily,” says Canavan. “If you have an advisor that you love and trust – well, that’s gold. The advisor will now be able to use us in concert with other investment vehicles their client might be interested in.”

Canavan believes the Wealthsimple model can be used to complement an advisor’s practice. Advisors can place clients into online portfolios that would be the core of their investment planning.

“We deliver the foundational aspects of a broadly diversified portfolio,” Canavan says. “Given the pension fund-like sophistication of our approach, a client can hold 50% to 80% of [his or her] portfolio in a structure like the one we would build.”

The remaining assets would be allocated for the client’s primary advisor to “look for alpha,” as Canavan says, and using a service such as Wealthsimple would allow the primary advisor to spend more time on financial planning, including tax and estate planning, insurance and alternative investments.

As well, advisors who are considering cutting clients with smaller accounts could place those accounts on an online platform.

The big flaw in the typical robo-advisor offering, Richards says, is that there is very limited face-to-face interaction for clients: “Many clients, especially older clients, still like to have that personal connection with an advisor.”

Still, there could be more “robo” services being offered in the advisory business in the near future. “This is already happening in the U.S.,” says Richards. “Four or five years ago, U.S. robo-advisors started marketing campaigns that targeted advisors as the enemy. Now, that is changing.”

Several U.S. providers now offer a two-tier distribution strategy, in which they market directly to the investor as well as to advisors.

Toronto-based Horizons ETFs Management (Canada) Inc. recently launched the Horizons Model Portfolio Program, an online tool exclusively for advisors’ use in constructing customized ETF portfolios. This tool enables advisors to determine risk parameters for their clients’ portfolios, then maintain that level of risk as volatility levels change, similar to a robo-advisor’s service. (For more on this online tool, see page 20.)

So far, none of the major banks or brokerages have shifted into the “robo” world. Toronto-based Bank of Montreal‘s discount-brokerage arm, BMO InvestorLine, provides the closest comparable service with its online adviceDirect service, which provides clients with some personalized advice by phone.

“[The adviceDirect service] is self-directed, in that clients do their own trading,” says Julie Barker-Merz, president and head of wealth direct investing with BMO InvestorLine. “But there is an algorithm that is used to guide the client on what to buy and sell and how to optimize their holdings.”

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