Will Robo-Advisors Take Over?

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Only 45% of Canadians aged 15 to 24 have invested in a savings plan, compared to the national average of over 65%, according to data from the CBC. The high advisory fees and high account balance minimums of traditional financial advisors have left many young Canadians searching for a more affordable alternative.

Robo-advisors first emerged in the aftermath of the 2008 financial crisis, providing investors with a simpler, cheaper, and more accessible way to grow their money. Robo-advisors – which are not literally robots – invest funds for clients by implementing Modern Portfolio Theory, the brainchild of Nobel Prize winner Harry Markowitz. Essentially, the theory maximizes expected return at any given risk level through the creation of a diversified portfolio of assets. Using algorithms, Modern Portfolio Theory allows for a more passive approach to investing, eliminating the need for a financial advisor to tinker constantly.  With this style of passive investing, along with specialization in exchange-traded funds (ETFs) characterized by lower fees than traditional mutual funds, robo-advisory firms are capable of offering a comparable service at a lower cost than their traditional counterparts.

Sparked by the arrival of Wealthsimple in 2014, robo-advisory has caught fire in Canada. Wealthsimple, the nation’s industry leader, manages over $2 billion of investments for more than 75,000 Canadian investors, but they are not the only players in the market. Firms such as Nest Wealth, Invisor, and Bank of Montreal’s SmartFolio – the first robo-advisory service offered by a Canadian Bank – are all taking advantage of this emerging trend. While the average fee charged on a Canadian mutual fund is around 2.5%, investors can pay a fraction of that through robo-investing, with fees starting at a mere 0.7% for Wealthsimple and 1.0% for BMO SmartFolio. Nest Wealth takes a slightly different approach, charging investors a flat rate of $20 per month for any investment up to $75,000. In addition to offering lower fees than traditional investment services, Canada’s robo-advisors also allow you to create an account with less cash. Wealthsimple, Invisor, and Nest Wealth have no minimum account size – you can start with just a dollar, if you’d like – while SmartFolio’s minimum is only $1,000, pennies compared to the tens of thousands of dollar minimums that old-school financial advisory firms require.

The high advisory fees and high account balance minimums of traditional financial advisors have left many young Canadians searching for a more affordable alternative.

Robo-advisors have also experimented with specialized portfolios, which are designed to meet the needs of different types of investors. For example, Wealthsimple’s Socially Responsible Investing offering prioritizes investment in companies that minimize carbon emissions, support gender diversity, and promote affordable housing. Meanwhile, their Halal Portfolio is screened by Shariah scholars to ensure it aligns with Islamic investing principles.

Throughout history, as new technologies enter the market, they are always met with a dose of skepticism. In 1943, Charmain of IBM Thomas J Watson believed “there is a world market for maybe five computers.” Just over 50 years later, Robert Metcalfe, inventor of the Ethernet, predicted the Internet to “catastrophically collapse” within the next year. Robo-advisory is no different.

Predictably, there is cynicism from traditional financial advisory firms, steadfast in their belief that they cannot be replaced by machines. One of these skeptics is Brent Brodeski, chief executive of Savant Capital, who, in a 2016 interview with Wealth Professional Canada, stated that robo-investors provide “absolutely no threat to traditional wealth managers.” However, there is also space for more nuanced concerns about the emerging technology. In an interview for the CBC, Dan Bortolotti, an investment advisor at PWL capital and editor at Money Sense, supports robo-advisors as “a fantastic tool for asset allocation and rebalancing,” but notes that they cannot manage other elements of personal finance, such as taxes and estate planning, that are typically offered by financial advisors. South of the border, Felix Salmon of Wired Magazine raises concerns that robo-advisors are abandoning their passive investing principles to garner larger management fees, slowly morphing into the traditional advisors that they claim to offer an alternative against.

With Canada’s robo-advisors continuing to grow in size and sophistication, will they eclipse the traditional investment advisor model our parents’ generation clings to? Not so fast. Canadian investment giant Power Financial, deeply entrenched in conventional wealth management and in charge of over $785 billion assets, owns a majority stake in the robo-advisor Wealthsimple. Similarly, National Bank recently invested $6 million in exchange for a minority stake in Nest Wealth, joining BMO SmartFolio and RBC InvestEase as bank-backed robo-advisors. As established investment companies and major banks enter the sphere of robo-advisory and the lines between upstarts and the old guard continue to blur, robo-advising is evolving. No longer a disruptive technology, it still offers an alternative to traditional active investing, and maybe, the opportunity to do better than a person with a conventional financial advisor – at the fraction of the cost.

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