Too many advisors underestimate the services of digital wealth firms.
You may think robo-advisors offer cookie-cutter, online-only services. But, through conversations with several robos, I’ve learned they offer more robust portfolios and client support than you may think.
Myth 1: Robos don’t offer access to portfolio managers.
In Canada, most digital wealth firms offer between five and 10 buy-and-hold, risk-adjusted model portfolios. But they also offer hybrid services, meaning registered reps get to know clients, and investment teams manage those portfolios, according to a September 2015 CSA notice.
Plus, robos hire registered reps to run their customer help lines. For instance, BMO’s SmartFolio service says its reps don’t offer personalized advice, but they do answer questions about KYC documents and clients’ investments—additional support is offered via video conferencing and online chat tools.
In the U.S., large robos such as Wealthfront and Betterment compete with traditional advisors by building personalized investment portfolios that use in-house experts and algorithms. For instance, ETF.com reports some firms use customized versions of the Black-Litterman allocation model, as well as hedging strategies. Betterment says its buy-and-hold portfolios only include ETFs, but people’s full financial details, goals and tax needs are taken into account, rather than mainly their risk-tolerances.
Myth 2: Robos don’t calm clients when markets are rocky.
Turns out, the robos we spoke to reached out to clients during downturns. These firms don’t want investors to stress about short-term volatility, so they reminded clients that they’re holding portfolios that aren’t meant to be tweaked and why—this is covered when investors sign up. And the message is reinforced through emails, newsletters and SMS messages.
For instance, during the first week of January, Canadian robo Wealthsimple sent an email about volatility and China’s economic downturn. That email, which the firm shared with Advisor.ca, said, “Concerns that a downturn in China could negatively impact the rest of the world have sent global markets sharply lower. [But], what does that mean to you? Not much. Stock market corrections happen all the time, and so do recoveries.” The firm also offered to answer clients’ questions, but says few called.
All of the people who reached out were confident as a result of the email, and because they’d already been warned to expect volatility, says Wealthsimple. Further, “Most people said, ‘I’ll start [contributing] more because it’s a good time to invest.’ ”
But if a client finds he has overstated his risk tolerance, he has options, says Wealthsimple. “Most investors don’t know how they’ll react when markets go down [and] our job is to prepare them. But, if they wanted more [or less] risk after experiencing [a downturn], we may increase their risk tolerance or vice versa.” However, this only happens if clients speak to portfolio managers about why they want to make changes, which occurs within a week of clients contacting the firm. If the manager approves, adjustments are made immediately. But, risk rating changes most often occur based on major life changes.
Further, U.S. firm Personal Capital has ramped up its services by offering regular access to its team of CFPs and experts, whom clients can message directly.
Myth 3: Robos don’t offer estate planning and tax advice.
Personal Capital also sets up initial meetings with new clients’ accountants, estate lawyers and other advisors. Plus, it offers conference calls once a quarter with in-house portfolio managers. Meanwhile, firms like Betterment assist with tasks such as tax-loss harvesting.
And both domestic and U.S. robos are connecting with clients through educational seminars and lunches, says a recent paper from Equisoft.
Still, since robos don’t provide personalized tax and estate planning, this is where traditional, full-service advisors come out on top. For example, if your client has been married multiple times, help him account for his complex family situation in his will and overall estate plan, and review this regularly. You can also beat robos by helping clients file their tax returns.
What else should you do to compete?
Most robos only offer ETFs, so consider offering individual stocks and bonds, mutual funds, and more complex products, such as derivatives. Your main prospect pool will be those who are seeking more flexible portfolios.
And, when markets are volatile, phone or meet nervous clients instead of sending generic, mass emails. To make time for these extra appointments, consider cutting down on mundane, back-office tasks by leveraging the types of technology and automation tools that robos use.
Also pay attention to how robos attract and serve clients. Canadian robo growth has been slow, but these firms are working with clients of all ages, and they use incentive and referral programs to build their clients bases (see “Stats from Canadian and U.S. robos,” below).
It’s predicted that the adoption of robo services could triple by 2017, with nearly nine out of ten Canadians saying they’re open to working with non-bank, online companies, according to a 2016 EY report. So, if you continue to ignore robos, you may find they’re scooping up your prospects.
Agree? Disagree? Sound off in the comments below (moderated) or email the author.
Stats from Canadian and U.S. robos
Robo-advisory firms have continued to pop up across North America, and big banks and wealth management firms are keen to enter the market. Here’s how Canada and the U.S. stack up.
• Of the big five banks, only BMO has entered the robo space so far. It launched its SmartFolio service in January 2016.
• Only 38% of Canadians use financial advisors, according to a 2015 BlackRock survey.
• Financial technology solutions are primarily used by Canadian consumers with incomes greater than $150,000 (20%), finds a January 2016 EY report. Usage declines to 15.1% among consumers with incomes between $70,001 and $150,000, and 7.9% for consumers with incomes between $30,001 to $70,000.
• Several big U.S. banks, including Morgan Stanley, Wells Fargo and Bank of America have plans to join the U.S. robo space. RBC Wealth Management U.S. has already made the move by collaborating with FutureAdvisor on a pilot program for clients who are still building their wealth.
• A survey of the largest robo-advisors reported aggregate assets of US$21 billion as of July 2015, up 34% over the previous year, finds an Equisoft white paper. Experts forecast that the U.S. robo-advice market could see AUM rise as high as US$2 trillion by 2020.
And, here are some details on specific robos that spoke to Advisor.ca.
Wealthsimple: As of February 2016, the firm had more than 10,000 clients with more than $400 million in assets. The firms says some accounts have a few hundred dollars, while others hold millions. There is no account minimum.
ModernAdvisor: Since its January launch, the firm’s Canadian arm has picked up about 300 clients. As of February 2016, the majority of the firm’s clients (93%) had less than $100,000 invested, while the remaining 7% had more than $250,000. None of the firm’s clients fell into the $100,000 to $250,000 range.
Betterment (U.S.): As of April 2016, Betterment has 150,000 clients with total AUM of $4 billion. Also, 30% of its client base is pre-retirees who are over age 55.