With stock markets trading at or near all-time highs, robo-advisors are working at educating clients to remain focused on their plan even when an inevitable market correction comes.
The problem of fretful investors making rash decisions during big swings in the market isn’t unique to robo-advisors. As financial advisors well know, clients selling off their portfolios out of fear when markets turn ugly and keeping your investments in cash may mean they missing the opportunity of a turnaround, as was the recent case with Brexit.
But robo-advisors have gained popularity in recent years during a period of relative strength on the stock markets, in part by marketing toward younger clients who may not have the scars of bear markets of the past to remind them they’re a natural part of the market cycle.
For many millennials, robo-advisors are appealing because they’re advertised as offering professionally managed portfolio advice at a relatively low cost. Such digital investment services ask a series of questions to determine an investor’s goals and risk tolerance before creating a portfolio using an appropriate mix of low-cost equity and bond ETFs.
Toronto-based Wealthsimple Financial Inc. starts first-time investors off in more conservative portfolios even if it might not be the right long-term asset mix, says Dave Nugent, the company’s head of investments.
“It’s much more important to get the first six months to a year right for a first-time investor and let them ease and dip their toe into the market,” he says, adding that it’s about educating clients about the risks of investing so that when the bad news comes, it doesn’t scare them off.
“If they sell within the first six months because the market goes down, it doesn’t matter whether their goal was one year or 10 years from now, they’re never coming back to investing,” he says.
Vancouver-based WealthBar Financial Services Inc., for its part, regularly communicates through its website, emails and hosts webinar sessions to help further client confidence and build trust, says Chris Nicola, the firm’s co-founder and chief technology officer.
WealthBar also uses a wide range of investment classes to help reduce volatility for investors.
“Robo-advisors haven’t been around very long, but the strategies that go into portfolio management and asset allocation aren’t new,” Nicola says.
Wealthsimple has full-time registered portfolio managers available for clients to talk to on the phone, over email or video chat, Nugent notes, adding that the company is also able to use its technology to identify and respond to investor concerns.
If a nervous client is constantly logging into their account on a day when markets are tanking, Wealthsimple can contact them even if they haven’t reached out to the company, Nugent says.
“We can use the data we collect on our clients to actually provide a personalized experience to what they’re feeling emotionally,” he says.
But Matthew Lekushoff, a financial advisor with Raymond James Ltd. in Toronto, says the personal interaction he offers can give him an edge.
“There’s a lot of trust there with my clients where they know that I’ve been doing this for over 20 years, I’ve seen a lot of different cycles, and we weather the storms very well,” he says. “I’ve got the ability to pick up the phone and walk them through what has happened in the past, what may happen in the future and how our approach will be better than selling everything off.”
Lekushoff compared using a traditional financial advisor to using a personal trainer.
“You tell me what your goals are, like a personal trainer, and I’m going to try to get you from where you are to where you want to be,” he says.
But Nicola says that kind of personal attention is unlikely for investors with small portfolios that are less lucrative to advisors.
“As advisors have continued to move upmarket, fewer and fewer people are getting that kind of relationship or advice,” he says.
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