Given the growth in the robo-adviser field, what's in it for investors? Here are some potential benefits and possible pitfalls.
A robo-adviser could provide many with less money to invest better service than they receive right now, says Dan Hallett, a vice-president and principal with Highview Financial Group in Oakville, Ont. He notes that wealthy investors receive plenty of care and attention from the investment industry but those with more modest portfolios often settle for commission-oriented advisers selling higher-fee products such as mutual funds. "The nice thing about this type of platform is it is not as picky around wanting just the wealthiest of investors. I think this really fills the gap."
It is a view shared by Jason Casey, portfolio manager with Questrade Inc., which operates the Portfolio IQ automated service. He notes that it provides convenience, low fees and access to an actively managed portfolio "previously only available to clients through advisers who don't generally take on accounts under $200,000."
Services such as Toronto-based Questrade's are based upon investments in low-cost exchange-traded funds (ETFs). Investors own ETFs "directly and not units in a pool like mutual funds, which has advantages like tax-loss harvesting, which we implement for the client at year-end."
The low-cost model lays out clearly what you pay in fees, something that the larger financial services industry is coming to terms with following the implementation of new reporting rules later this year (the Client Relationship Model, Phase 2, or CRM2) that requires companies to detail annual "hidden" costs such as service fees, referral fees and embedded commissions on investment products.
"We expect [adoption of automated advisers] to increase when CRM2 is in place and advisers are forced to disclose how much they are being compensated," said Questrade's Mr. Casey.
Quality of human advice
The Canadian investment industry has long been criticized for high fees, which often come with the retail investment model of advisers selling mainly high-cost mutual funds.
"This is going to threaten what I call the marginal adviser," Mr. Hallett says. "It is basically people who are pure product salespeople, they don't take very much of a consultative approach. They really are contacting clients for transaction purposes and people probably stay with them just out of inertia."
As new entrants, automated advisers need to innovate to stand out in an increasingly crowded market. "We were the first robo adviser to come out with a socially responsible investing option, and that is because especially our younger clients were asking for it," said Navid Boostani, co-founder and chief executive officer of Vancouver-based ModernAdvisor.
WealthBar, another Vancouver-based automated adviser, has added more sophisticated wealth services, such as estate planning and insurance offerings, says Neville Joanes, the company's portfolio manager and chief compliance officer. "We can do sophisticated financial planning [such as] retirement income protections."
Discomfort with technology
Although services are not truly robotic, featuring at least some human interaction, many investors (particularly non-tech-savvy people) want to see a friendly and familiar face for annual performance reviews. "I certainly get that, especially older people, sometimes they value that personal relationship with an adviser. They understand that they are paying more and they are willing to pay the extra fees because they are just more comfortable with that relationship," says Mr. Boostani of ModernAdvisor.
Change requires effort
Even if you know you can save on costs, are you willing to fire your human adviser or demote them to a lesser role? It's something that WealthBar's Mr. Joanes knows firsthand with his in-laws, who have said repeatedly they will move to an automated service but never have. "'When we have five minutes we will do it,'" is the response he gets.
Why pay for simple
On the surface, this is perhaps the strongest argument against automated advisers. Why pay for someone to build you a low-cost, ETF-based, buy-and-hold portfolio when you could do it yourself. On the other hand, this may be harder than it seems, says Highview's Mr. Hallett.
"It sounds really easy to do and you say, 'Why the heck do I need help doing that?' The reason is that people can't stop themselves doing something. Frankly, sometimes the hardest thing is just to sit on your hands and leave it alone."