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Investors win as traditional advice goes up against digital

By Susan Yellin | May 23 2017 07:00AM

Digital advice is not a passing fancy that will go away in a few years’ time but the good news for traditional financial advisors is that investors still want and need their advice, the Federation of Mutual Fund Dealers annual conference was told. In the end, the big winner will be the investor as traditional mutual fund dealers lower their prices to compete against their less expensive robo-advisor competitors.

Digital advice has fundamentally changed the entire wealth management industry, attracting not just millennials but other investors who want to move faster through a complex industry, Randy Cass, CEO of Nest Wealth, told the April meeting.

While many assumed that added value could be had only through human contact, algorithm-heavy robo-advice has now made financial information more of a commodity, forcing traditional advisors to justify their fees, he said.

“I will say, there has never been, ever, a better time to be an investor,” said Cass.

Fraction of the cost

Robo-advisor firms are now targeting investors with under $100,000 of investable assets as their target markets because they can offer investors advice at a fraction of the cost of traditional advisors, he said.

However, the industry has also realized that traditional advisors do add value for certain investors. Doug Steiner, CEO of Evree Corp., a Toronto-based financial technology robo-advisor firm, said studies indicate only 18% of Canadians want to invest by themselves.

Some firms that dropped human advisors are now bringing back that option for investors who want to speak to a “live” person at the other end of the phone.

“So the notion that the entire industry is going to be gutted and there will be no place for the human advisor, I don’t think that’s going to happen,” said Cass.

Cass said financial advice is not the travel industry, where many clients have opted to go online to book their own trips rather than go through a travel consultant. “The original analogy a few years ago was that everyone was going to get Expedia-ed out of this industry.… If anything, what we’ve seen over the last two years has been a shift away from the pure digital process to [firms] that have human advisors.”

Partnerships with advisors

While he said digital wealth is “irrefutably better” for the investor and the industry than traditional methods, many digital-based companies are announcing partnerships with advisors – alliances that would never have been contemplated even a few years ago.

Wealthsimple portfolio manager Mike Allen said his robo-advice firm is working with 300 advisors. Last year, the company announced Wealthsimple for Advisors, which lets advisors streamline their practices to focus on investors’ more complicated issues, such as taxes, trust and estate planning.

Steiner suggested advisors become dually licensed to expand their businesses and make themselves more valuable in the eyes of the investor. “If you’re selling someone a mutual fund, it’s not very difficult to ask them if they need a mortgage,” said Steiner.

Some large financial institutions are getting in on the robo-advice action. National Bank announced in late April, for example, that it was investing $6 million in Toronto-based Nest Wealth. The bank will use Nest Wealth technology to enhance the bank’s internal digital platforms to benefit its clients.

In a separate session at the conference, Karen McGuinness, senior vice president, member regulation compliance with the Mutual Fund Dealers Association (MFDA) of Canada, said that a chosen investment must not only meet suitability requirements, but also the issue of cost, as noted in recent proposals by the Canadian Securities Administrators (CSA).

“I can only speak for the MFDA, but I think the issue has been that cost, typically, historically, has not been much of a thought process in suitability, so I do believe that the CSA raising cost as an issue, including it in suitability is appropriate. [But] it can’t be too far on either end – it has to be a reasonable assessment.”

Suitability has been behind a number of CSA regulatory proposals, including embedded commissions and the best interest standard.

One of the unintended consequences of suitability of either client or product is that everyone seems to be painted with the same brush, said Dave Pelletier, chief operations manager, with Carte Wealth Management Inc.

Plain vanilla investments

Suitability is becoming increasingly complex and some advisors may get to the point where it’s just easier for them to give all their clients a plain vanilla investment, he said.

McGuinness said regulators want to ensure that know-your-client (KYC) information is reasonable and that it applies to specific client needs. For example, a person coming in to buy a GIC may not want to give an advisor information about their other financial issues such as their mortgage.

With more products becoming increasingly complex, it’s almost as if advisors need to have a much deeper understanding of every product they sell, added Ellen Bessner, a partner with Babin Bessner Spry LLP in Toronto. “I think [know your product] is on steroids because the suggestion is that you even have to know the products that you are not selling.”

Rhonda Goldberg, senior vice president, client and regulatory affairs with IGM Financial, said advisors typically have three to five product manufacturers with whom they deal, adding it would be a shame if product shelves continued to shrink because of a greater push on know-your-product information.

“The main concern I’m worried about is that regulation is supposed to be about protecting clients and ensuring they get what they paid for,” added Pelletier. “This is dangerously going down a path I don’t think will be good for the client. There’s just no possible way that an advisor can know all the other products out there.”

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