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automated investing: domestic choice

Automated, or robo-adviser, services are poised to shake up the Canadian financial advice industry.Feng Yu/Getty Images/iStockphoto

It is no exaggeration to say that automated, or robo-adviser, services are poised to shake up the Canadian financial advice industry.

More aptly described as automated investing services that allow people to select and manage investments online with the support of allocation algorithms and also the occasional human interaction, robo-advising is quickly moving from market niche to mainstream.

While some of the companies offering these services are startups, established financial services companies are taking notice; for instance, Bank of Montreal has started offering its own online platform.

These online services are attracting investors who are comfortable with technology and prefer not to to spend the time with face-to-face interaction with a financial adviser.

The costs to use robo-advisories in Canada are generally attractive, particularly for those with relatively small amounts of investable assets.

"Advisory technology has come a long way in the last few years," says Anthony Boright, president of InvestorCom Inc., which assists asset managers and investment dealers with regulatory compliance.

"They range from self-help, don't-talk-to-anyone solutions where everything is online, to services where if you have a question you can talk to a real adviser."

For instance, Chris Nicola, who co-founded WealthBar in 2014, says his investor service offers automated investment decisions, along with "financial advisers [who] provide direct one-on-one financial planning for our clients." WealthBar is affiliated with Mr. Nicola's family firm Nicola Wealth Management.

Generally, automated advisory firms see their target market as largely millennials – people who are starting to build up funds but don't yet have a lot and who are comfortable with technology.

They simplify investment by offering a limited range of portfolios, usually based on exchange-traded funds (ETFs).

Automated advisors are designed to fill the gap between people who are entirely comfortable trading online and doing their own research, and clients who look for and may need more hands-on advice, says Dave LeRiche, director of strategy at BMO InvestorLine in Toronto.

"It's for people who are comfortable with managing their investments online, but don't have the time or capability to make confident [investment decisions] by themselves."

The investors "don't have to do anything except decide how much they want to deposit, check their balances and see how their investments are tracking toward their goals," Mr. LeRiche says.

Unlike more conventional online investing, which relies on the investors to buy and sell, robo-adviser clients allow the algorithms to rebalance their portfolios when the balances vary from the targets the clients allocated.

These targets are determined by a simple questionnaire that prospective clients can fill out online, and in many cases the service is augmented by a chat line or phone or e-mail advice.

"You don't get the person in the panelled office on the 70th floor of one of those bank towers, who will hold your hand," says Moshe Milevsky, associate professor of finance at the Schulich School of Business at York University in Toronto.

"But many people do not need that."

One thing to note about robo-advisers is that their heavy reliance on ETFs makes the portfolios easy for do-it-yourself investors to replicate, avoiding fees altogether, says Pauline Shum, finance professor at Schulich.

Dr. Shum is also president and co-founder of PW Portfolio Analytics, which offers portfolio analysis to institutional and retail investors.

"There's not a lot of effort that goes into [portfolio design] compared with what traditional asset managers do," she says.

While this may be fine for newer or smaller retail investors, "I don't think a basket of seven or eight ETFs will work for high-net-worth investors [usually considered those who have more

than $1-million in investable assets]."

Another potential weakness in robo-advice is that "the nature of the advice is completely devoid of recognizing what you do for a living," Dr. Milevsky says.

"They'll ask: How old are you, what's your time horizon and what's your risk tolerance. But the investment needs for people who answer those questions the same way can be very different," he says.

Robo-advice is evolving quickly and becoming ever more sophisticated, though, Mr. Nicola says: "We are always hard at work pushing the envelope."

Available in Canada

While some of the robo-advising companies are still small, more than 10 have already launched in Canada. They include:

- Bank of Montreal's SmartFolio, the first entrant from among Canada's big banks. SmartFolio offers exchange-traded-fund (ETF) portfolios that are primarily BMO's own ETFs. Like other robo-advisers, SmartFolio lets clients access their accounts by computer, tablet or smartphone. The management fees and expenses (management expense ratio or MER) are a weighted average of between 0.2 and 0.35 per cent of the client's account, with a minimum of $15 per quarter that is waived for clients who deposit $250 or more in the quarter.

- Nest Wealth, based in Toronto. Founded by Randy Cass, a former portfolio manager and BNN TV host, the company charges a flat monthly price of $20 to $80, depending on the size of the portfolio. The company says it is independent from any particular fund or ETF companies.

- Questrade Portfolio IQ, whose investment style mixes passive ETFs that follow major indexes with actively managed ones. The Toronto-based company offers portfolios that range from aggressive growth to conservative income. Fees range from none at the smallest account level to 0.7 per cent of the account.

- WealthBar, based in Vancouver, which also mixes passive and active ETFs and offers hands-on planning as well as automated portfolio management. Unlike pure tech-based advisory services, each WealthBar client gets a dedicated financial adviser to help plan and make decisions. Fees range from none at the smallest account level to 0.6 per cent of the account.

- Wealthsimple, based in Toronto, offers clients up to 10 portfolio models. Fees range from none at the smallest account level to 0.5 per cent of the account.

- Invisor, based in Oakville, Ont., offers model portfolios using ETFs and mutual funds. There is no minimum investment, and fees range from 0.3 per cent of the portfolio to 0.6 per cent, depending on its size.