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Should financial advisers fear the robos?

Automated investing services mesh nicely with fee-only advisers, but the big finance firms will feel the pain eventually


Date: October 25, 2016

Canadians regularly hear warnings about robots coming for their jobs, but for those in the financial services field, the cyber threat is real and present.

Robo-advisory services are here and offer some tangible benefits to investors, the most obvious being ease of use and low fees.

So are advisers worried? In the United States, where the technology is more established, the fear is real. According to a survey from consultancy PricewaterhouseCoopers, 60 per cent of asset and wealth managers fear losing part of their business to financial technology companies with offerings such as robo-advisory services.

Here in Canada, where automated investing services are taking longer to gain traction, the concern is not yet palpable.

“If someone is looking to save some money on some fees, I think robo-advisers could help them,” says Brian Poncelet, a certified financial planner in Oakville, Ont.

He is not worried about automated advisers eating into his bread and butter: established Canadians with complex finances. “On bigger accounts, especially if you factor in the tax deductibility in a number of cases, people are no better off. They can actually potentially be worse off if they have a reasonable amount of money.”

Robos are an easy, low-cost way to invest. The services utilize ultra-cheap investment products such as exchange-traded funds and model portfolios. For millennials, who are accustomed to using their phones and laptops to make purchases big and small, automated advisory services are comfortable rather than threatening.

These services are also not going to fade away, if Bank of Montreal’s embrace of the concept with its SmartFolio robo-service is any indication.

Robo-loving millennials are in the early stages of their careers and investments, so their adoption of automated investing solutions has likely not yet hit most financial advisers, who deal with Canadians at bank branches, across the kitchen table or, for wealthier people, in swanky downtown offices.

So what does robo-advising mean for traditional financial advisers?

Sandi Martin, a fee-based financial planner in Gravenhurst, Ont., says, “If the only thing you do as a financial adviser is construct a portfolio and manage it, and a robo-adviser can do that exact same thing for much, much cheaper, that is best for consumers.”

She sees the long-term role of an adviser as more of a quarterback than a stock picker or portfolio maker. “Your time should be focused on tackling some of the behavioural or coaching things that a robot probably can’t accomplish as well – hopefully.”

Ms. Martin has a Darwinian view when it comes to automated services. “I would rather [investors] start savings with a robo than, say, with their dad’s insurance agent or at the bank, which gives them exactly the same as the robo-adviser but they package it in really nice terms and charge an extra one and a half per cent.”

Robos will not pledge undying loyalty to their investor clients, but they will be there for the long haul, which is not guaranteed for those big operations that rely on branch networks or armies of kitchen table advisers.

“I know it coming from a banking history – the person behind the desk changes a lot,” she says. The same goes for big mutual fund companies.

Tim Faunt, a certified financial planner in Calgary, has a similarly benign view of robo-advisories. “It is a little bit different for me than the average adviser because I’m a fee-only adviser. So where [average advisers] probably think they are the devil, I kind of think they are awesome.”

Mr. Faunt’s philosophy is to identify the lowest-cost financial products possible for clients, such as exchange-traded funds. So automated investing services with their rock bottom prices mesh nicely with his philosophy.

He expects Internet-based services to win more business steadily over time from the finance industry establishment, especially as millennials accumulate and inherit more wealth over the coming years.

The big finance firms “are probably going to either do what BMO is doing and start their own, or probably the other guys will just buy one that is already existing. It is going to be a big challenge for them, for the big fund firms, the Investors Groups of the world and all those guys with the big management expense ratios. Once people figure out they can save half or more from what they are paying now per year, yes, I think there is going to be a drive towards it.”

Likely the last place the robos will make their presence felt is among high-net-worth Canadians, who have more complex problems than Canadian families with two salaries, perhaps a pension or two, and straightforward taxes.

“Certainly there has been talk – and I’m going to call it hype – but the impact to our business has been pretty limited because we are more in the higher-net-worth space, which tends to be a different demographic at this point,” says Chris Reynolds, president and chief executive officer of Investment Planning Counsel Inc.

The firm employs about 900 financial advisers across the country working regularly with what Mr. Reynolds calls the “sudden money crowd,” those with new-found wealth from the sale of a major asset such as a farm or a business, or an inheritance.

“Those types of individuals are more looking for the relationship, the face to face. The scope of planning far exceeds just investments. It is estate planning, taxation, that kind of stuff.”

Mr. Reynolds sees the children and grandchildren of his clients attracted to automated advisory services. His hope is that they will eventually outgrow them.

“It is a good starter, and it is a good way to accumulate money,” he says. “And at some future point I think that is when the advice channel will take over.”

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