Editor’s note: This is the first article in a three-part series on online investment advisors. Part 2, which will focus on what to look for when choosing a provider, will be published on Wednesday. Part 3, which compares online services with traditional providers, will publish on Friday.
A tech-savvy investor in his early 30s, Raj Suri is turned off by high fund fees and biased advice. He's wary of investment salespeople who he sees as little more than product pushers.
"I had my money elsewhere and I wasn't really happy about it," the Mississauga, Ont., real-estate agent recalls. So he opened an account with the online Portfolio IQ service managed by Questrade Wealth Management Inc., which offers portfolios of exchange-traded funds through its discount-brokerage platform.
Portfolio IQ's online questionnaire placed Suri in a growth portfolio, which is where he wants to be, given his long-term investing horizon and high risk tolerance. And he has slashed his costs. "The fees are really low. It's really transparent. Now I know what the fees are." Besides, there's still a human element. When Suri has questions, he can email or phone his advisor at Questrade. He feels no need for face-to-face contact.
Simple. Accessible. Cheap. Transparent. That's what many investors want, and aren't getting. Unless you have at least a six-figure amount to invest, you're likely to be snubbed by many of Canada's biggest investment brokerages or redirected to a bank branch.
Enter the robo-advisors -- or online investment advisors, as they are more accurately described. It's now possible for you to open an investment account, deposit cash, complete an online questionnaire and start investing in a portfolio, all without necessarily having any prior direct contact in-person, by phone or via email with an individual registered advisor.
Online investing technology has lowered the barriers to entry into the advice-giving industry, and is expanding the choices available to investors who are seeking alternatives to the established providers of product and advice. Minimum account sizes are low, typically $5,000 or less, if there is any minimum at all.
Robo-advice holds particular appeal for millennials, the first generation to have grown up in a digital world of email, texting, downloading and web surfing. One of them is Diraj Goel, who is in his late 30s and is the head of technology for a Vancouver business-software developer.
Seeking low-cost portfolio management, Goel was impressed with how easy and convenient it was for him to open an online account with Wealthsimple. "It was way less than what you'd normally have to go through when opening an account with a standard investment advisor." He also likes the fact that there is a human factor. "Wealthsimple has been great with their follow-up," he said. "They reached out via email."
The first wave of robo-advisors in Canada has been led by non-bank brokerages such as Questrade and Canadian Shareowner, and financial-technology start-ups such as Wealthsimple, Invisor and Nest Wealth in the Toronto area, and WealthBar and ModernAdvisor in Vancouver.
"Financial services is broken in many ways. Access to advice is a real problem," says Wealthsimple's 28-year-old founder and CEO Michael Katchen."Even if you have access to advice, you're paying an arm and a leg," says Katchen, who along with several colleagues successfully exited an online photo-sharing and digitization start-up before entering the robo-advice business.
Since its launch in September 2014, Wealthsimple has grown to $400 million in assets under administration, enough to be able to afford TV ads on this year's Super Bowl telecast in Canada. The firm's success to date suggests that there's a critical mass of investors who want advice but are looking for alternatives that are cheaper and more transparent, and that will perhaps serve them better than who they've dealt with in the past.
It's all too common, unfortunately, for some old-line firms to keep investors uninformed about the cost of advice. This will change when new regulations on fee transparency -- part of the Client Relationship Model 2 (CRM2) package of reforms -- take effect in July. By contrast, robo-advisors are very transparent about what they charge and aren't shy about publicizing their fees.
That's because their advice portion is only about half of what traditional advice-givers charge – and in some instances much less than that. For example, Nest Wealth Asset Management Inc. -- which operates in Ontario, Alberta and Manitoba -- charges a flat advisory fee that starts at $20 a month for accounts up to $75,000, and is capped at $80 a month for assets of $150,000 or more.
Another undercurrent of discontent that robo-advisors have tapped into is dissatisfaction with the uneven quality of advice. Investors who seek advice need a rigorous process for assessing their investment objectives, risk tolerance and time horizon. That's generally true of robo-advice. For what it lacks in personal touches, it operates within defined risk parameters. The quality of traditional advice, unfortunately, can range anywhere from excellent to abysmal and the investment process can range from rigorous to haphazard. The investment community itself is outspoken about the need to raise the bar for advisor proficiency, and the emergence of robo-advice will intensify the competitive pressure to do so.
Though robo-advice is still in its infancy in Canada, it isn't taking long for the financial-services establishment to get in the game, one way or another. Wealthsimple for instance, presents an upbeat millennial vibe, with its eye-catching website dominated by colour photos and videos depicting care-free clients.
Yet one of Wealthsimple's main stakeholders is the powerful conglomerate 
Power Financial Corp. (PWF). Power, whose subsidiaries include Investors Group, Great-West Life and Mackenzie Financial, announced in April of last year an agreement to invest up to $30 million in Wealthsimple.
Subsequently, Wealthsimple made the first significant acquisition in the robo-advice space. In December of last year, it took over the robo-pioneer Canadian ShareOwner Investments Inc. The discount brokerage was the Morningstar Awards winner in 2014 for Best Use of Technology for its groundbreaking Model Portfolio Service that builds low-cost ETF portfolios for self-directed investors.
Over time, here will be as many variations in Canada on the robo theme as there are industry players. Click on the website for RoboAdvisors Plus, for instance, and you'll be directed to a reduced-rate model-portfolio service that's a small sideline for De Thomas Financial Corp., a full-service mutual-fund dealer based in the Toronto area.
In one form or another, expect some ETF and mutual-fund companies to have a robo presence, as Vanguard does in the United States. For example, the Horizons family of Toronto-listed ETFs has retained PUR Investing Inc., led by ETF portfolio-building expert Mark Yamada, to create a series of six model portfolios of Horizons ETFs. The holdings are disclosed on Horizons' public website. But the firm's Horizons Advisor Model Portfolio Builder service, which includes a client questionnaire, is delivered exclusively to advisors.
Most of the growth in online investing will come from big-name companies that recognize how online technology can cut costs, improve service and open up new business opportunities. Among the early adopters is BMO Financial Group, which in January launched its BMO SmartFolio service through its full-service brokerage subsidiary BMO Nesbitt Burns Inc. SmartFolio places clients in ETF portfolios while also providing multiple options for support, including live chat, phone calls and email.
Joanna Rotenberg, head of personal wealth management for BMO Financial Group, emphasizes the bank's commitment to online investing, and cites the competitive advantages that it enjoys. In common with its big-bank rivals and other financial-services giants, these advantages include scale, large client bases, well known and widely trusted brand names and well established asset management, advisory and online brokerage businesses.
Will the industry giants elbow out smaller independent brokerages and robo-advice start-ups? Not a chance, according to Edward Kholodenko, president and CEO of Questrade Inc. On the contrary, Kholodenko says he welcomes the competition as a validation of online, technology-driven advice. "We think it's early days. The more life we can sustain in the online industry, the better for everyone," he says. "It will cause the market to grow at a faster rate."
