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

Little more than a year after robo-advisors made their début in the Canadian financial services market, several of Canada’s big banks are exploring how they can build their own digital advice platforms for clients.

However, these financial juggernauts are unlikely to be trading in their flesh-and-blood advisors for hardware and software anytime soon.

The major issue for the banks is to find a way to introduce digital platforms in such a way as not to befuddle clients or upset existing wealth-management offerings.

“[Banks] have to be very careful and cautious,” says Gregory Smith, wealth-management advisory leader with Ernst & Young Canada in Toronto, adding that there is potential to confuse clients with an array of access points to wealth-management services.

Banks will need a plan to educate their clients about the new platforms and how they would meet clients’ specific financial needs.

The banks generally are tight-lipped about what they are planning regarding digital platforms. However, Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and HollisWealth Inc., a subsidiary of Bank of Nova Scotia (all headquartered in Toronto) have said they either are about to launch a robo-advisor or are looking closely at how such a platform would fit within their business offering.

Case in point: HollisWealth will launch a robo-advisor platform in 2016, says Farhan Hamidani, the firm’s chief operating officer and managing director. The new platform will be offered through HollisWealth’s existing retail advisor force.

For example, HollisWealth is developing a digital “onboarding” tool for its advisors’ websites rather than creating a separate, stand-alone offering. HollisWealth also intends to offer retirement planning, insurance planning and education planning in future.

RBC Wealth Management, a business unit of RBC, has signalled that it is exploring digital options for its clients. RBC emphasizes the importance of its advisors, particularly in dealing with the complex planning situations of wealthy clients, but the bank does see an opportunity to automate some of its services for all client segments.

“In Canada, while our high net-worth and ultra-high net-worth clients continue to tell us they value their wealth manager as the cornerstone of their relationship and that our advice is critical to meeting their complex needs, we also are investing in digitally enabling advisors and exploring our options to offer clients additional ways to invest with us,” according to an RBC spokesperson in an email to Investment Executive.

As well, robo-advice platforms are definitely on the minds of executives at CIBC.

“We are evaluating that as a prospective new channel proposition,” said Steve Geist, senior executive vice president and group head, wealth management, during CIBC’s Investor Relations Day conference in October. “We think it’s very logical that [a robo-advisor platform] would fit within a spectrum of offers from full advice through to no advice.”

Geist added that CIBC is well positioned to offer some form of digital advice because the bank manages a balanced index fund and has the potential to cross-sell to other products, such as insurance.

“We have all of the component pieces of a robo offer today,” he said. “We just haven’t assembled it and put it out to our clients in a more cohesive and overt manner.”

Toronto-based Bank of Montreal also is reportedly launching a robo-advisor platform through its brokerage arm, BMO Nesbitt Burns Inc., at the end of 2015. The bank has yet to confirm the existence of the platform officially, but a BMO spokesperson says Nesbitt does intend to launch a new service of some kind in the near future.

Montreal-based National Bank of Canada unveiled a quasi-robo platform in 2014 called InvestCube. That platform operates through National Bank Direct Brokerage Inc., a wholly owned direct brokerage subsidiary of the bank.

InvestCube is not a traditional robo-advisor, in that clients must make their own portfolio selection from a choice of five. However, the asset mix in each client’s portfolio is rebalanced automatically, as it would be with a robo-advisor.

Although Toronto-based Questrade Inc. doesn’t have any advisors because it is a discount brokerage, Questrade Wealth Management Inc. offers a robo-advisor platform called Portfolio IQ. Since Portfolio IQ launched in November 2014, the robo-advisor has helped the parent company provide clients – who perhaps don’t want to manage their assets themselves – with more options, says Edward Kholodenko, president and CEO of Questrade Inc. Both companies are wholly owned subsidiaries of Questrade Financial Group Inc.

That so many large financial services institutions are taking a close look at these emerging advice technologies is no surprise, given recent trends in demographics and regulatory changes in Canada.

“It’s almost like a perfect set of conditions for something like robo-advice,” says Smith.

Smith sees several reasons for this “perfect storm,” including:

– Baby boomers are moving from accumulation of assets to deaccumulation and may be looking for alternative – and cheaper – ways of managing their money in retirement.

– An aging advisor force means that there may be fewer advisors to work with clients.

– Regulatory changes such as the second phase of the client relationship model may cause clients to be more sensitive regarding price.

– Greater comfort with digital technology generally already exists..

Furthermore, a recent survey from U.S.-based J.D. Power and Associates found that seven in 10 Gen Y/Z investors (individuals under the age of 35) surveyed were interested in a robo-advisor platform, while 56% of all investors surveyed said they found such an offering appealing.

Mike Foy, director of wealth-management practice at J.D. Power in New York, says banks have little choice but to acquire or develop their own robo-advisor technology in future.

Yet, doing so doesn’t necessarily require reinventing the wealth-management wheel.

“On the one hand, right now Canadians like having a financial advisor,” Smith says.

“But on the other hand, you have all these forces that look as though [digital advice platforms] will be attractive to Canadian investors. It’s just a question of how does a large, existing wealth-manager introduce that capability.”

– with files from Leah Golob

© 2015 Investment Executive. All rights reserved.