After years of paying an adviser for help with his finances, Leonard Rempel decided to make a switch. His choice? A robot.
"I was okay with having to pay fees to my financial adviser, but when I dug deeper into the sales charges I was paying, that is when I started to get uncomfortable," says Mr. Rempel, a 55-year old regional sales manager in Oakville, Ont.
Robo-advisers are fairly new in the Canadian financial landscape, but are growing in popularity. These advisers are actually computerized programs that offer clients an online risk-assessment tool. The tool calculates an appropriate asset allocation based on age, financial goals and risk tolerance. The results provide clients with a recommended investment portfolio predominantly made up of exchange-traded funds.
While there are only a handful of providers in Canada, the service is booming in the United States, where the online technology platforms are rapidly growing. As of December, 2014, robo-advisers in the United States held $19-billion (U.S.) in assets under management, a 65-per-cent increase since April, 2014, according to a report by Corporate Insight, a market research firm.
Whether the Canadian market will see similar growth has yet to be determined, but the allure of a low-cost investing option, mixed with the security of receiving financial advice, is starting to catch people's attention.
One of the big attractions of robo-advisers are the fees. Management fees range from 0.25 per cent to 0.60 per cent. In comparison, working with a financial adviser can range from 1 per cent to 2.5 per cent.
The issue of fee transparency is making waves in Canada as financial advisers will have to start disclosing investment fees and performance to clients as of July, 2016. For some investors, these announcements are making them take a closer look at the amount of fees they're paying.
Those fees made a difference for Mr. Rempel. After digging, he discovered many of his investments were sitting in funds with a deferred sales charge (DSC), meaning he would be charged a redemption fee for taking out his funds early. (Many DSC funds have redemption fees that charge a certain percentage within the first seven years of the investment). Mr. Rempel decided to bite the bullet six months ago and paid out $19,500 in deferred sales charges to make the transition to a robo-adviser.
"I realized that I needed to have more fee transparency," Mr. Rempel says. "I was going back and looking at old statements and I'm sure my adviser had explained these DSC funds, but nowhere on the statements does it show a breakdown of how the fees are being paid out."
It's still early to determine his investment returns, but so far the overall experience of his initial investment (10 per cent of his portfolio) led Mr. Rempel to move 100 per cent of his spouse's portfolio and 85 per cent of his own. The remaining 15 per cent of his portfolio is held at a discount brokerage.
The term "robo-adviser" implies there is a lack of human interaction, but that isn't the case. Firms such as WealthBar Financial Services, Nest Wealth Asset Management Inc. and Wealthsimple Financial Inc. do offer clients the ability to communicate with a licensed representative via phone, e-mail, text messaging and, in some cases, video conferencing. But conversations might not grasp a client's full financial picture, especially if the investor only discloses a portion of their investment portfolio.
"The one thing these tools do not do is have a conversation about your dreams, and your goals and your aspirations," says Darren Coleman, a portfolio manager with Raymond James Ltd. "Advisers do a lot more than just address investment portfolios. We help improve a client's net worth – not just their returns."
But the account minimum requirements to work with an investment adviser can be significantly higher than what investors have sitting in their portfolios.
Lisa Kendrick, a marketing manager, started working with a financial adviser at the age of 21 due to an existing relationship the adviser had with her parents. After six years, she had built up her investment portfolio to just less than $100,000, but felt that she was limited in terms of the products her adviser was offering. Ms. Kendrick found the robo-adviser ETF offerings, and the daily portfolio rebalancing tool, the solution she was looking for.
"I was only invested in two funds because that was all I was allowed to access," says Ms. Kendrick, who moved her entire portfolio to a robo-adviser last year. "I knew I wanted more options but I am not a 'do-it-yourself' type."
But putting all your eggs into one algorithm could be risky business.
"The problem that can arise with these platforms is that people tend to overstate their risk tolerance when filling out risk forms," says George Hartman, managing partner at ELITE Advisors Canada Ltd. "Online questionnaires are not able to dig deep enough into the emotional side of investing. Conversations that gauge an investor's reaction to a market downturn, as well as when markets soar, need to happen."
Clare O’Hara