Canadians who use robo-advisors are significantly more likely to indicate that they’re not interested in personal finance and are confused by financial jargon vs investors who either use direct investing brokerage services or work with a financial advisor, according to recent research from Mississauga, Ont.-based Credo Consulting Inc.
In addition, Canadians who use direct brokerages are much more likely to say that they have a good understanding of financial matters and have the knowledge to build their own financial security, relative to investors who use robo-advisor platforms or investors who work with a financial advisor.
“Do-it-yourself [DIY] investors are much more likely to feel in control and ahead of the game financially,” says Hugh Murphy, managing director of Credo. “In contrast, ‘robo-advised’ investors feel relatively disengaged and defeated by matters of personal finance.”
The findings of this research come from the Financial Comfort Zone Study, an ongoing national consumer survey that Credo conducts in partnership with Montreal-based TC Media’s investment group. (TC Media publishes Investment Executive.)
Among the Canadians who have more than $250,000 in investible assets who were surveyed as part of the study, investors who use robo-advisors exclusively gave an average score of 3.6 out of 10 to the statement: “Personal financial matters are of no interest to me.”
In contrast, investors who have more than $250,000 in investible assets and use direct investing platforms exclusively gave the same statement an average score of 1.4. Investors who work with an advisor exclusively gave this statement an average score of 2.2.
Furthermore, survey participants who use robo-advisors exclusively gave an average score of 4.7 to the statement: “I find financial jargon and terminology confusing or intimidating.” In comparison, investors who use direct investing platforms exclusively gave the same statement an average score of 2.7. Investors who work with an advisor exclusively gave this survey statement an average score of 4.3.
Robo-advisor platforms tend to draw clients who prefer to use digital services but aren’t necessarily interested in managing their own money, says Dave Cassie, managing director, consulting and deals, with PricewaterhouseCoopers LLP in Toronto.
“[Robo-advisors] appeal to investors who are not comfortable making investment decisions [and] don’t have the confidence to invest on their own,” Cassie says. “Robo-advisors have simplified the process and made it very consumer-centric. [Robo-advisors] appeal to people who like the Uber or Airbnb experience.”
According to Credo’s research, investors who use robo-advisors exclusively tend to be younger and have fewer investible assets than investors who use direct brokerages or who work with advisors.
That robo-advisors appeal to younger investors is no surprise, says Eric Kirzner, professor of finance at the University of Toronto’s Rotman School of Management and an advisor to Toronto-based robo-advisor Wealthsimple Inc.: “[Young people] really want simple, low-cost solutions to pretty much everything they do, including investments.”
However, Credo’s research found that older investors and those in the mass-affluent or even high net-worth segments also are drawn to robo-advisors.
Chuck Grace, lecturer at Western University’s Richard Ivey School of Business and financial services sector consultant with Bigger Picture Solutions Inc. in London, Ont., says the “value proposition” of robo-advisors resonates with mass-affluent investors who may be skeptical about the value of full-service advice: “They perhaps aren’t seeing the value for the fees they’re paying and want something cheaper, less intrusive and more convenient.”
Although direct brokerages also offer the advantage of convenience and low costs, investors who use these platforms tend to be more confident and comfortable in taking charge of their investment portfolios.
Survey participants who use direct investment platforms exclusively gave an average score of 8.4 to the statement: “I have a good understanding of the financial matters I need to address at this stage of my life.”
In comparison, investors who use robo-advisors exclusively gave the same statement an average score of 7.2. Investors who work with an advisor exclusively gave this statement an average score of 7.7.
In addition, survey participants who use direct brokerages exclusively gave an average score of 8.3 to the statement: “I have the knowledge to build my own financial security.”
In contrast, investors who use a robo-advisor gave the same statement an average score of 6.8. Investors who work with an advisor gave this statement an average score of 6.6.
The direct-investment platform generally attracts sophisticated investors who understand their investment objectives and approach, Cassie says: “They’re comfortable making investment decisions and don’t feel the need for support. They do want research tools, but not necessarily advice.”
However, some investors may use direct brokerage services because they don’t have the asset levels to qualify for advice at a full-service firm, says Sara Gilbert, founder of Montreal-based Strategist Business Development: “Some people end up on these platforms not by choice, but because they had nowhere else to go.”
In the years to come, some DIY investors, especially baby boomers, are going to give robo- advisors a look, Gilbert adds: “[These investors] will want something in the middle [between DIY and full-service].”
Robo-advisors also have affected the investment industry overall, as some full-service firms incorporate robo-advisors into their services, Cassie says: “Robo-advisors are providing a [source] of real innovation and a test lab for consumer behaviour.”