Rise of robo-advisors in mortgage business could have an impact

When Randy Cass, founder and CEO of Nest Wealth Asset Management Inc. in Toronto, launched his online investment advice platform last year, he was hoping to strike a chord with clients. He wasn’t expecting to be inundated with inquiries from financial advisors.

“Advisors were calling us to find out how we could work together,” Cass says.

Cass’s goal was to serve a segment of clients who had been falling through the cracks: clients who had been sold high-fee managed products because they didn’t have the million-dollar minimums now often required for personalized financial advice.

Less than a year after Nest Wealth’s launch, in addition to the current platform, Cass is also developing an advisor platform that will allow investment dealers and individual financial advisors to outsource traditional functions, such as portfolio rebalancing and tax-loss harvesting for their clients.

So-called “robo-advisor” platforms are web-based services that offer clients an alternative to dealing directly with an investment advisor. These online firms assess a client’s risk tolerance, then calculate an appropriate asset allocation based upon age, financial goals and other criteria. Clients then receive a recommended portfolio of funds, which usually consists mainly of exchange-traded funds (ETFs).

Unlike online discount brokers, robo-advisor platforms provide automatic rebalancing of clients’ portfolios. And these services come at a fraction of the cost of a human advisor.

Most robo-advisors charge management fees of 0.25%-0.60%, depending upon the client’s asset level, plus the fee of the underlying ETF. (Nest Wealth offers clients customized ETF portfolios for a flat fee of $80 a month, or $40 a month for clients under the age of 40.)

When robo-advisors first appeared in the U.S. a few years ago, the platform was seen as a technology fad that might just fade away. But as the number of entrants – and the assets they hold – continues to grow, robo-advisors are becoming a major force in the investment industry. As of December 2014, robo-advisors in the U.S. held $19 billion in assets under management (AUM), a 65% increase since April 2014.

One of the largest U.S.-based robo-advisors is Palo Alto, Calif.-based Wealthfront Inc., which has amassed $1.8 billion in AUM in just three years.

The robo-advisor industry is less mature in Canada, but a handful of players have entered the fray and are attracting clients.

The conventional reaction among advisors to the emergence of robo-advisors is that they represent a threat, competition for the various conventional advisor business models.

But executives at robo-advisor firms (who dislike the term “robo-advisor”) prefer to view their businesses as potential partners for advisors.

“We come in peace,” Cass says. “Our intentions are exactly the same as a [traditional] advisor’s intention: we want to provide investors with the greatest chance to achieve the best possible outcome.”

Striving to succeed in a land of robos doesn’t have to come down to man vs machine. Perhaps you can find ways to use robo-advisors as a tool. You might outsource tasks such as investment management and portfolio rebalancing to these platforms. Or you might refer some clients to a robo-advisor, thus freeing up your time so you can interact more with top clients and prospects.

The following steps may help you to survive – and thrive – in a robo-advisor environment:

educate yourself

Whether you see robo-advisors as friend or foe, educating yourself about the online advisory landscape is a must, says Ric Edelman, chairman and CEO of Edelman Financial Services LLC in Fairfax, Va. Edelman’s independent advisory firm is a success story. The firm has US$14 billion in AUM and more than 100 advisors in more than 40 offices throughout the U.S. Edelman has created his own robo-advisor offering as separate entity from his advisory firm.

While robo-advisors provide online risk assessment, asset allocation and rebalancing, the appeal to middle-income clients lies in the platform’s low minimum investment thresholds and fees. Minimum investment levels range between $5,000 and $25,000. Fees usually run at 0.25%-0.60%, depending upon a client’s asset level. Clients also pay the fee of the underlying ETF.

These online platforms aren’t all “robotic.” Clients can contact a “live” human if they desire, and many robo-advisor platforms assign a “dedicated” licensed representative to each client, which means clients will deal with the same person every time they call (unlike calling a call centre). Depending upon the robo-advisor provider, the representative on the phone could be a licensed portfolio manager or an investment counsellor. Clients also may reach their reps via email, text message and video conferencing. Reps typically contact each client annually to reassess his or her financial situation and risk tolerance.

assess your value proposition

While Cass says he comes in peace, Edelman believes robo-advisors will put more than half of financial advisors out of business over the next 10 years.

If price and performance are your two selling points, Edelman says, then you’d better be prepared for a mass walkout of clients. For an advisor who offers investment planning or is heavily focused on the top end of his or her book, that could spell trouble.

“The vast majority of advisors have a value proposition that tells clients the advisors can make more money than anyone else and that the advisor will charge them less,” Edelman says. “That isn’t going to cut it anymore.”

Those two claims – performance and price – which have been the basis for the investment industry for the past two centuries, Edelman says, are severely undermined by the presence of robo-advisors, Advisors need to create a value proposition that goes far beyond that claim.

Edelman’s advice: “Those who emphasize financial planning and who are providing goals-based advice will be ahead of the game because these are not areas that electronic algorithms can solve for clients.”

partner with a robo-advisor

Cass believes many clients of robo- advisors are looking only for the investment-management service. So, the future of the financial advisory industry lies, in many cases, with advisors who cultivate relationships with clients and forge partnerships with robo-advisor platforms.

Two Toronto-based robo-advisors, Nest Wealth and Wealthsimple Financial Inc., are developing platforms that will allow advisors to maintain their existing client relationships while making use of robo-advisor services.

When you work with robo-advisors to assist in the investment management of your book of business, the portfolio rebalancing can be outsourced to the robo-advisor while you maintain the relationships with your clients. You will continue to discuss major financial planning goals and be able to select portfolios with your clients.

Robo-advisors that offer advisor-only platforms charge a platform fee to the advisor, which, says Michael Katchen, founder and CEO of Wealthsimple, will be less than 0.5%. (That’s less than what Wealthsimple charges most consumers.) The advisor-only robo-advisor platform can be co-branded with your name and your dealer’s logo.

“The future isn’t about robots versus humans, where one wins and one loses,” Cass says. “I believe that the future will see a ‘bionic’ solution – part man, part machine – where, ultimately, the investors come out far ahead of where they are now.”

Katchen agrees that advisors’ value lies in services other than investment management. “If you were to ask a large group of advisors where they think they add value for clients,” he says, “the majority would say, ‘Financial planning advice.’

“We want to work with advisors,” Katchen adds, “and take care of the investment-management side of the business at an extremely low cost. [That] will free up the advisor to focus on the higher value-added components of his or her practice.”

While the partnership concept is in its infancy in Canada, U.S.-based wealth-management firms already are partnering with robo-advisor platforms. Some online platforms, such as New York Betterment LLC and San Francisco-based Upside Financial LLC, have partnered with major U.S. financial firms such as Boston-based FMR LLC (a.k.a. Fidelity Investments) and Omaha, Neb.-based TD Ameritrade Corp. The online platforms provide advisors with direct access to the robo-advisor offering at a discounted rate.

In Canada, both Wealthsimple and Nest Wealth advisor-only platforms will allow you to outsource investment-management functions, so that you can focus on other important elements in your practice, such as meeting with clients and reviewing financial plans.

respect the technology

Although many clients will continue to work with advisors, the next generation of clients are migrating toward online platforms. These younger, tech-savvy clients will be drawn to online offerings that can provide fast, easy solutions.

Whether you use a robo-advisor platform or not, you must at least understand them.

“Most of the advisors who will be leaving the business will be those who are faced with technology challenges,” Edelman says. “[Technology] creates a massive opportunity for [advisors] who are agile in the field.”

refer your clients to a robo-advisor

A referral arrangement could be a solution for you and your clients – and drive future business for you, says Jeff Marsden, president of Toronto-based Oxygen Ventures Inc., a consultancy to technology firms.

You might have a segment of clients who are being underserved or who no longer fit your business model. By referring those clients to a robo-advisor service, Marsden says, you could help both your practice and your clients.

“Disengaging with clients with whom you have a personal relationship can be challenging,” Marsden says. “The [referral] would offer them an alternative solution.”

As those referred clients’ portfolios grow within the robo-advisor platform, Marsden says, the clients eventually may require a human advisor and be referred back to you.

John Nicola, chairman and CEO of Nicola Wealth Management Ltd. in Vancouver, is well versed in both the advisory and robo-advisor platforms. Two years ago, Nicola’s son, Christopher, and Christopher’s wife, Tea, launched WealthBar Financial Services Inc., a robo-advisor firm. John has an equity interest in WealthBar, but is not involved in running the firm.

John Nicola, who has been running his high net-worth advisory practice for 20 years, believes advisors should refer clients who may fall below the advisor’s minimum account balance to robo-advisors – rather than forming partnerships with robo-advisors: “I think some version of robos interacting with advisors will occur in the future. But I don’t encourage my advisors to do so.

“What makes a robo-advisor’s model powerful,” he adds, “is that they deal directly with clients, and offer online advice and online services at a very good price. The strength is not in [robo-advisors] being a back office for advisors.”

launch your own platform

If you have the ambition and the resources, you might even do what Edelman did: launch your own robo-advisor platform:

“How better to understand the robo- advisors than to become one?” Edelman asks. “We launched the platform partly to figure out what they are doing and how they are doing it. We also wanted to understand the challenges and opportunities in online advice.”

Although Edelman’s traditional and robo-advisor platforms are independent of each other, clients of the robo-advisor platform can access a financial planner from the conventional side if need be. And, so far, more than half of Edelman’s 1,000 robo- advisor clients have, at some point, requested a live financial advisor.

Robo-advisors: the key players

The following are the main “robo-advisor” firms in Canada:


Toronto-based Wealthsimple’s services are available in Alberta, Manitoba, Quebec, Ontario and B.C.

Nest Wealth Asset Management Inc.

Operating in Ontario only, NestWealth has plans to expand across Canada this year. The firm plans to launch an advisor-only offering.

WealthBar Financial Services Inc.

Based in Vancouver, WealthBar offers ETF portfolios for clients across Canada.

ShareOwner Investments Inc.

One of the first robo-advisors to enter the Canadian marketplace, ShareOwner launched in early 2014.

Portfolio IQ

This firm was launched in late November 2014 by Toronto-based Questrade Inc., which has been in the online brokerage space since 1999.

Horizons Model Portfolio Program

The Horizons program, offered by Horizons ETFs Management (Canada) Inc. and developed by PUR Investing Inc., both of Toronto, is aimed specifically at advisors. This tool, which is available free of charge, generates individual portfolios of exchange-traded funds for advisors’ clients.

© 2015 Investment Executive. All rights reserved.