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New disclosure rules mean big opportunities for robo-advisers

Michael Katchen, Founder and CEO of Wealthsimple, is photographed in the company's west end offices on April 21 2016. (Fred Lum/The Globe and Mail)

Fred Lum/The Globe and Mail

New regulation is usually met with a certain level of wariness from business owners, but Randy Cass is welcoming CRM2, an upcoming change in the financial services industry, with open arms.

"It's a solid step forward for transparency and a solid step forward for our business," says Mr. Cass, founder and CEO of Toronto-based robo-adviser firm Nest Wealth. Like the handful of other robo-adviser firms in Canada, he expects to cash in once the new rules come into place on disclosing investing fees. Right now, Nest Wealth employs 15 people, but Mr. Cass expects to double in size over the next 12 months.

"The only thing standing in our way of mass adoption is the fact that most people don't have a starting point to understand how much they're paying," says Mr. Cass. But that's about to change.

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The Client Relationship Model, Phase 2, or CRM2, is a new fee-disclosure policy that came into effect July 15. The changes, implemented by Canadian Securities Administrators, will require wealth-management companies to provide investors with an annual summary of charges paid by the investor, as well as the compensation the firm receives.

According to the CSA, registered firms will need to provide an annual report on charges and compensation that shows, in dollar amounts, what the dealer or adviser was paid for the products and services it provided. Starting July 15, investment firms have one year to comply with the new reporting standards, which require companies to detail annual "hidden" costs such as service fees, referral fees and embedded commissions on investment products.

It's causing some unease in the industry, but robo-adviser firms like Nest Wealth are anticipating an uptick in business when people start seeing their bills and questioning how much their advisers are pocketing.

Mr. Cass expects the move will wake up Canadians as to how much they're paying in fees each year, and that, in turn, is great news for his company's low-cost services.

"Every single day we're bringing in assets and opening accounts. We're bringing in seven figures a week on a consistent basis," he says. "That's going to grow."

Robo-advisers are online wealth-management services that provide automated portfolio management advice with minimal human intervention. The online registration is simple and smartphone-friendly. Clients answer a series of questions to determine their investing strategy and risk tolerance. The firms then use an algorithm to create a portfolio for each individual. Most, like Nest Wealth, mainly invest in a basket of exchange-traded funds (ETFs).

Robo advisers charge management fees – either a flat monthly rate that varies depending on the account size, or a percentage of the assets being managed. The fees tend to be substantially lower than their traditional counterparts.

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Michael Katchen, CEO and founder of Wealthsimple, is also anticipating CRM2 to be a "huge wake-up call" for investors. Mr. Katchen runs the biggest robo-adviser firm in Canada. Since its launch in September 2014, the company has grown from a handful of staff to employing approximately 50 people with over 20,000 customers.

"You would be shocked to learn the number of clients that don't know they're paying these fees," he says. "It's crazy because Canadians pay the highest fees in the world when it comes to investment management and yet we are so unaware because they're hidden."

Big financial institutions are also trying to capitalize on the demand for transparency. The Bank of Montreal, for example, launched its SmartFolio automated investing service in January, making it the first of the big banks to do so.

But while banks are entering the space, Mr. Katchen is trying to bring traditional advisers to Wealthsimple. Just over a month ago, his company launched a new platform called Wealthsimple for Advisors, which allows advisers to focus on advising clients, while his firm manages clients' portfolios.

"We see a lot of advisers trying to get ahead of these changes and one of the ways is moving their books onto our new platforms," he says.

While the new fee disclosure policy provides opportunities for newer players, industry experts are cautious to see how the industry will react. "Regulators did not mandate a format for disclosing the information required under CRM2," says Neil Gross, executive director of investor rights group FAIR Canada.

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"It remains to be seen therefore whether dealers will provide the key information up front, isolated and in a manner designed to attract the client's attention, or buried in a sea of other information and account data."

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