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Robo-advice comes to Canada

By Kate McCaffery | February 17 2015 09:00AM

One-by-one they emerged in 2014: Would-be robo-advisors, seeking the various approvals needed from regulatory authorities to provide guidance and product options – online, and on the phone only – to the large number of Canadians who don’t exactly have traditional advisors lining up to help them.

What the robo-advisors firms are offering, product wise, is not exactly new. Upon opening an account with an online advice firm, and filling out the usual Know-Your-Client (KYC) documentation – a process which has been made automatic – clients are directed to a selection of unleveraged Exchange Traded Fund (ETF) portfolios to choose from, based on the client’s KYC answers. What is new, however, is the cost, with most fees coming in well under 1%.

“The general population is changing,” says Guy Armstrong, senior consultant and managing director at Investor Economics. “The advice businesses are all heavily focused in the top part of the mass-affluent segment, high-net-worth, which leaves a big opening at the low end of the wealth market for someone who comes up with an idea that’s affordable, with the capacity to serve a lot more people. I think that’s what these things are coming out to capitalize on – there are a lot of people who need to save, they just don’t have much money.”

Automatic rebalancing

In looking at the online advice providers opening up shop, he adds it’s unlikely they will appeal to those already fully indoctrinated as a do-it-yourself (DIY) investor. (That said, he adds two firms – National Bank Direct Brokerage and Canadian ShareOwner Investments – have introduced similar, automatic rebalancing ETF portfolios, making them available to discount brokerage users too, without the KYC component.)

Online advisors, he says, “are for do-it-yourself consumers who are comfortable with the technology, with online execution and online fulfillment, but who aren’t quite sure how to bring that to bear when it comes to investments.”

This niche in between full service and discount brokerage, where people shop at 11p.m. on a Sunday night and open accounts when they’re ready, is where online advice providers in Canada hope to make their stand.

In examining the potential for an online-only advice offering, Chris Nicola and Tea Nicola, co-founders of WealthBar Financial Services, examined the full-service, family office model being used at Nicola Wealth Management. They also closely examined the KYC process, among others, during their efforts to understand how much of the client experience could truly be automated in a way that would satisfy everyone involved.

“We found there were a lot of superfluous questions being asked of clients. Most advisors weren’t even really relying heavily on the KYC to make decisions for the client – they were just picking mutual funds, most of which were balanced anyway,” says Chris Nicola, Wealthbar’s chief technology officer.

Pre-made portfolios

The practice of directly matching appropriate, pre-made portfolios to a client’s KYC responses, “in my opinion,” he adds, “is better than what the industry has been doing with the KYC up until now. I would say it’s an improvement of role.”

Of the entities in Canada who offer either products or services which roughly fall into the category though – ten, if you include the brokerage portfolios mentioned above, BMO’s InvestorLine Advice Direct Program, where clients are advised, but execute transactions themselves, and two more firms, reportedly getting ready to launch – each appears to be somewhat unique.

“With online discount brokerages, what’s being offered is a lot more clear cut. It’s more about which discount brokerage has the best pricing for buying and selling stock and which one is the easiest use. With robo-advisors, there are definitely going to be differences.”

Nicola’s firm, for example, is purported to be the only in Canada which offers full-service planning, including insurance. It registered with provincial regulators across the country in January.

All the new entities do share some similarities, however: Each offers a fixed assortment of investment options, almost exclusively constructed using ETFs. “One or two have said they will provide F-series funds as well,” Armstrong says, but “we haven’t seen any of that yet.”

Across the board too, all online advisory accounts in Canada are overseen by real advisors and portfolio managers. If the Ontario Securities Commission (OSC)’s position is any indication, it will likely stay that way for the foreseeable future.

Overseen by real advisors

In its Annual Summary Report for Dealers, Advisors and Investment Fund Managers, dated September 25, 2014, the OSC says “Each of the firms we have registered to provide online advice, operate on a discretionary, managed account basis, using portfolios of unleveraged ETFs, or low-cost mutual funds. This is not the so-called “robo-advice” model seen in the United States,” they write. “Account representatives remain actively involved in decision making. We do not think an entirely automated decision making process would be acceptable at this stage.”

“One of the first misunderstandings is that it’s all automated,” agrees Nicola, “that computers are picking investments for you. It’s not anywhere near that complicated or even that sophisticated. It’s more a matter of automating business processes.

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