Canadian discount brokerage clients interested in robo-advisors’ services

“There is a big opportunity there to meet the needs of [the mass affluent] segment of the market that’s not necessarily inclined to spend a tremendous amount of time managing their own portfolios, but not necessarily affluent enough or even interested in having a traditional advisor,” says Mike Foy, director of the wealth-management practice at J.D. Power in New York.

But while many investors are interested, few really understand these emerging automated investment firms. In fact, only 22% of survey participants said they were aware of robo-advisors, which offer investors automated portfolios at a lower cost than a traditional full-service wealth-management service provider.

Investor interest in robo-advisors is in keeping with the growing demand for “guidance-based” relationships, says Foy. Such relationships are created when discount brokerages offer more services and resources to clients. For example, investors gave a satisfaction score of 848 on a 1,000 point scale when they were contacted two or more times by their discount brokerage about products and services; when they used at least one financial planning and monitoring tool; and when they were made aware of resources such as seminars and webinars.

This year’s survey results suggest that discount brokerage firms still have a ways to go in meeting their clients’ demands as overall investor satisfaction dropped this year. The industry average satisfaction score for 2015 is 729 compared with 736 in 2014. The study measure investor satisfaction with their discount brokerage firm based on the following six factors, in order of importance: interaction; account information; trading charges and fees; product offerings; information resources; and problem resolution.

Discount brokerage firms included in the study ranked as follows in overall satisfaction scores: National Bank Direct Brokerage (753); BMO InvestorLine (736); TD Direct Investing (734); RBC Direct Investing (733); Questrade (724); Desjardins Online Brokerage (720); CIBC Investor’s Edge (718); Qtrade Investor (716); Scotia iTRADE (712); HSBC InvestDirect (709).

The drop in satisfaction is likely due to recent market volatility and investors’ growing expectation for more than just lower prices from their discount brokerages. In fact, since 2012 the difference between the most expensive and cheapest discount brokerages has fallen by 50% and fees dropped overall in 2014 for the third year in a row.

“Low fees are increasingly being taken for granted,” says Foy. “They’re sort of table stakes that virtually everybody provides now.”

Indeed, discount brokerages would be better off spending their time explaining fees rather than lowering them, says Foy. Only 35% of survey participant said they completely understood their fees compared with the 42% who said the same in 2014.

Being transparent about fees and making sure clients comprehend the cost of advice fully are likely to become larger issues across the entire financial services sector with the implementation of the second phase of the client relationship model (a.k.a. CRM2) taking place. Indeed, Foy says investors in the advice channel may take a closer look at discount brokerages and robo-advisors once they understand the cost of doing business with an advisor.

“There may be some sticker-shock there,” he says. “And there may be a sense that they’re paying more than they realize they did and their questioning the value they’re really getting from their traditional advisor which could open up an opportunity for somebody to consider the robo-advisor model.”

The survey includes responses from more than 2,700 discount brokerage investors in Canada. Responses were gathered between May 4 and June 1.