Banks eyeing robo-advisors to attract millennials

“We’re attracting a lot of young professionals away from the banks,” said David Nugent, portfolio manager and chief compliance officer at WealthSimple.

The firm, which launched in September, has been growing its client base by double digits and adding a couple million dollars to its assets under management each week, according to Nugent.

As Canada’s securities regulators continue phasing in new rules that require investment advisors to disclose how much they’re collecting in fees, investors are expected to start seeking out low-cost alternatives.

Robo-advisors typically use a questionnaire to determine an investor’s level of risk tolerance, then invest the client’s assets into a passive exchange-traded fund (ETF) portfolio that is regularly rebalanced using algorithms.

By removing the need for office space, in-person meetings and a costly staff of fund managers, robo-advisors are able to provide low-fee services, even to clients with relatively meagre assets. While many larger institutions charge as much as 2.5 per cent, robo-advisors charge as little as 0.3 per cent, depending on the size of the client’s account.

“I think this business is creating a lot of interest among the banks, for the simple fact that we can have a profitable client at a much lower asset level,” Nugent said.

The model is not without its drawbacks. There are concerns about whether a questionnaire can be sophisticated enough to appropriately determine an investor’s appetite for risk. The companies are new and relatively untested, and they can’t replace the personalized advice that high net worth clients receive from human advisors.

But in the past, Canadians who didn’t who didn’t have enough assets to warrant hiring a full-service investment advisor had few choices beyond mutual funds. Robo-advisors seek to provide a cost-effective alternative — and unless they come out with similar platforms, the country’s biggest banks risk losing customers.

Last fall National Bank (TSX:NA) launched InvestCube, an online service that provides investors with five different ETF portfolios designed for various levels of risk tolerance.

Others, including the Bank of Montreal, (TSX:BMO), Scotiabank (TSX:BNS) and TD Bank (TSX:TD), have said they are taking a wait-and-see approach.

“We will watch all of these new players and new models that are emerging and if it makes sense for our clients we will seriously look at it,” chief executive Bharat Masrani said following TD Bank’s annual meeting last month.

Some investment advisors and financial planners have suggested the banks might not be keen to launch online investment managers, as doing so may eat away at their mutual fund businesses. But Julie Barker-Merz, president of BMO InvestorLine, said it’s important for financial institutions to adapt to changes in the industry.

“As things evolve some businesses get cannibalized and that’s okay,” she said.

Dan Bortolotti, a Toronto-based investment advisor and the blogger behind Canadian Couch Potato, says some robo-advisors seem to be positioning themselves to get bought out by larger financial institutions.

However, he noted, many of them were founded by entrepreneurs with an anti-industry stance as a way of addressing what they view to be an “unfair, almost predatory model.”

“If you are with one of the do-nothing advisors, who don’t really do anything except throw you in some random mutual funds and never talk to you, well then you are definitely a candidate for looking at switching to a robo-advisor,” he said.