Editor’s note: This is the third article in a three-part series on online investment advisors. Part 1, published on Monday, introduced the players in the budding Canadian robo-advice industry. Part 2, which focused on what to look for when choosing a provider, was published on Wednesday.
Robo-advice seems like a great alternative for young investors whose assets are smaller, whose financial-planning needs are fairly simple, and who have other things on their minds than saving for a retirement that is decades away. What's a matter of ongoing debate is the extent to which algorithms can replace advisors as time marches on and your life becomes more complex.
Mortgage, personal debt, insurance. Marriage, children, aging parents. Illness and accidents. Wills and estates. When and how to draw down on your savings. The list of complexities of modern financial life are seemingly endless.
If you need more than asset allocation and rebalancing, the current generation of robo-advice services will at best be only a partial solution. "As your wealth accumulates, think about whether you will want more complex services and diverse investment products than what can be provided by online advisors," the Investor Office of the Ontario Securities Commission recommends.
For now, that's good advice. The question is: Will robo-advisors ever be capable of addressing financial-planning needs adequately?
The case for flesh-and-blood advisors to be able to serve investors much better than algorithms was made at the 2015 conference of the Investment Funds Institute of Canada, whose members include both fund companies and advice-giving fund distributors. Among the speakers was the incoming IFIC chair John Adams, who is CEO of PFSL Investments Canada, a mutual-fund dealer that is the primary distributor for the Primerica family of funds.
Adams dismissed the notion that robo-advice can replace personal service. "Robo-advice will not be helpful for the growing number of vulnerable investors who may not have the cognitive ability to assess alternatives and to make the best possible decisions about their investments in the absence of some meaningful guidance," Adams told IFIC delegates. "Many vulnerable investors lack the ability to enter their complete information accurately into the computer fields needed for the robo-advice algorithm to produce a recommendation," he added. "No computer simulation can overcome these challenges to achieve the personalized guidance and coaching that a knowledgeable advisor provides."
Or can it? Computer programmers have given us automobiles that can drive themselves, and chess-playing software that can beat the world's top grandmasters. If IBM's Deep Blue can outplay former world champion Garry Kasparov, will a Robo-Advisor 3.0 program be able to craft a better financial plan than your friendly neighbourhood financial planner?
Perhaps not yet. Even so, the gap between robo-advice and professional financial planning is destined to narrow. "Anyone who doesn't believe in the power of artificial intelligence is in denial, regardless of what industry they're in," says financial-services consultant Kendra Thompson, the North American lead for wealth and asset management services for Accenture. "Advisor tools are becoming more and more sophisticated, and more equipped and capable of handling more complex scenarios."
In its December 2015 research paper on robo-advice, Accenture predicted that "smart machines" -- capable of complex reasoning and interaction with humans – "will transform the investing landscape in potentially disruptive ways." For wealth-management firms, the consulting firm added, "robo-advice services can be a bet on the future -- a way to get customers and financial advisors working with machines that can enhance and extend human performance."
In these early days of robo-advice in Canada, we're nowhere near being able to replicate the services that a qualified financial planner can provide. Robo-advice 1.0 is very much focused on asset allocation and on the selection of securities that are proxies for asset classes. For more complex financial-planning needs, one alternative would be to retain the services of both a robo-advisor and a qualified financial planner.
Pramod Udiaver, co-founder of the online advisory firm Invisor Financial Inc., says that for advanced levels of financial planning, robo firms need to either outsource these services or else expand their range of advice and expertise. Invisor has addressed this issue by having both an investment subsidiary and an insurance subsidiary, and it's developing online tools to address clients' insurance needs.
Among mainstream advice-giving firms who aren't about to replace warm bodies with robots, expect online technology to be adopted for some administrative procedures. These could include "paperwork" such as account openings, and collecting or updating know-your-client information. Introducing a robo element will cut costs and enable advisors to spend more time giving personal advice that an algorithm isn't currently capable of giving. It may also bring down the asset size at which advisors are willing to take on new clients.
Perhaps the biggest challenge for robo-advisors is to try to replicate the personal handholding that risk-averse clients may need during severe market downturns. Can a robo-advisor convince frightened investors to avoid bailing out at the worst possible time?
"When these downturns occur, financial advisors are often there meeting and handholding their clients," says Greg Pollock, president and CEO of Advocis, a national organization for financial advisors. "Assuring them that this will pass, things will get better, and not to panic, and not to sell their investments when they're devalued by a market downturn."
Early 2016, with bearish market conditions across multiple continents, presents an early trial by fire for robo-advice. Times like these are when psychological support matters the most. And it's that type of support that a capable and caring advisor with a strong personal connection is better able to deliver than an email blast from a robo-advisory firm.
DALBAR, a consulting firm for the investment industry with offices in Boston and Toronto, recommends that robo-advisory firms have plans in place to deal with situations when investors may be most vulnerable to negative behaviour. The firm recommends studying market history to see what "maximum impact" events led to bad decisions in the past.
As DALBAR's historical studies of investor behaviour have found, investors as a group have consistently had lower returns than the funds that they invest in. Part of the value that a traditional advisor can bring is their ability to influence behaviour and to set realistic and achievable expectations linked to personal goals, says Anita Lo, vice-president of DALBAR's Canadian practice. "The greatest challenge for robo-advice providers will be their ability to replicate the level of engagement found in face-to-face interactions."
