First off if the term Robo Advisor sounds like a scary ‘foreign’ concept you might want to start with this post What And Who Are The Canadian Robo Advisors? The Robo Advisor phrase was imported from the US where the Robo concept was first popularized by companies such as Betterment. If you ask the Chief Investment Officers or creators of the Canadian ‘Robo’ investment companies they’ll likely tell you that they do not like that Robo term. Most of them will tell you they offer a Digital Investment Platform or a better moniker might be Digital Wealth Management.
The reason why the word Robo does not work that well is because these investment companies are all quite human and various levels of advice and help is available. The technology becomes an enabler to run the investment portfolios.
There’s humans when you want them and digital when you don’t.
But certainly these are digital investment platforms and digital advice platforms for many Canadians who will self-serve on the investment sites and they will go digital ‘all the way’ from initial sign up to the portfolio recommendation and beyond. Many Robo Advisor clients will have little or no contact with the advisors and support staff.
But here’s why I think the Robo Advisors/Digital Wealth Management firms will shine in the next major stock market correction; the clients actually complete risk analysis questionnaires. They have to, that’s an absolute compliance-must. The clients have to sign off on the questionnaire and portfolio recommendation. And at many of these Digital Wealth Managers an advisor will go over each client profile and questionnaire and will contact the client via email or phone to ensure investment suitability. As I had outlined in my review of Justwealth every new client application and profile lands on the desk of the Co-Founder and Chief Investment Officer. So much for that Robo term.
Here’s an example of the risk profiling as per Nest Wealth.
These are more than important questions and considerations. In fact, there is nothing more crucial than investing within our risk tolerance level. When we invest outside of our comfort level that’s when bad things happen – such as losing money. And make no mistake, humans make for terrible investors and they/you/we have a terrible track record. Investors around the world often take on way too much risk; they invest outside of their risk tolerance level and they end up losing money or only being able to grab a modest portion of the investment gains that are available over longer periods.
Here’s a famous er make that infamous study on investment returns that were available vs the actual investment returns that were realized once you factor in investor behaviour. We see the investors underperforming lowly bonds. Most would have been better off in guaranteed GICs in Canada and CDs in the States.
Investors are investing outside of their risk tolerance level, they’ve got that Buy Low – Sell High thing backwards. Too many investors are known to Buy High when things look rosy and then Sell Low when things are scary and the markets are in the tank and perhaps the economies have entered a recession. It’s the job of an advisor or digital advice advisor platform to turn around this typical investor behaviour.
This from Carl Richard’s Behaviour Gap.
So we’re going to trust the most important part of investing to an online questionnaire? I say absolutely. At least we know that the important questions are asked and answered, and we hope that the clients take their time to understand and answer those questions honestly and with care. I’d suggest the above Nest Wealth questionnaire is framed nicely and clearly so that clients understand that risk is involved and the questionnaire probes on how one might feel in a market correction and how they might act in a market correction.
On the flipside I know from my 5 plus years at Tangerine as an advisor on the Tangerine Portfolios (digital investment platform) that Canadians who invest using their big bank funds or with other ‘advisory’ firms that you know by name (they are mostly mutual fund sales arms or tentacles) have mostly not been made to understand the risks. I conducted Portfolio Analysis for clients looking at their external investments and I would continually find a complete mismatch between the client’s investments and their risk tolerance level. There had been no proper coaching or risk profiling.
Tangerine Investments was Canada’s first digital advice investment platform, launched in January of 2008. As I would tell clients ‘they picked the worst date to start an investment offering since the Great Depression’. Of course 2008 preceded the steepest market decline in our lifetime. Here’s the S&P 500 (US stocks) from January of 2008 through to end of 2010. The chart is courtesy of portfoliovisualizer.com
50% drop, look out below.
But while Canadian and US retail investors were dumping their actively managed mutual funds (in Canada usually obtained by the above bank and mutual fund tentacle sales offices and their accompanying advice and risk profiling procedures) the Tangerine ‘Robo Clients’ were adding new monies on a regular schedule, every day. That’s right every trading day was net positive with net new inflows through the correction.
Net, net, the old human way failed again. The new digital way worked.
Human ‘advised’ – Bad behaviour.
Robo advised – Good behaviour.
OK it’s only one round but here’s the scorecard: Humans 0 – Robo 1.
I was on the floor when there were more modest 15-20% corrections and once again, all trading days were positive with net inflows. So make that Humans 0 – Robo 1.5. Other Digital Wealth firms have reported on the very good behaviour of their clients through recent market volatility.
Global News ran a piece this week The Next Recession Will Be A First For Robo Advisors. Are They Ready?
Of course the folks at Global will first have to read this blog to know that the next market correction will not be Robo’s first rodeo. And in that Global article you’ll read some interesting commentary from Dave Nugent, head of investments for Wealthsimple.
The Digital firms have a lot of investor coaching tricks up their Robo sleeve. Mr. Nugent offers …
A bear market, he said, will be “our time to shine.” Though Wealthsimple has only been around since 2014, it has seen its share of stock-market roller coasters, Nugent said. And the company has honed a strategy for helping clients stick to their long-term financial strategies and keep saving.
Every time there is a market correction, Wealthsimple sends out an email to all users encouraging them to keep calm and carry on.
Not only that, the Digital Wealth Providers can monitor the activity or their clients. They can actually get a better read of how the clients are acting and feeling compared to traditional human advice platforms. They can use technology to monitor online behaviour.
Mr. Nugent adds …
But there is also more targeted communication for clients who have a track record of more frequent account logins during market dips, a behaviour that suggests a more nervous user, and those who have experienced larger losses — for example, because they started investing at the peak of the market.
In addition to the standard email, these clients also receive a more personalized message via the Wealthsimple app to help them understand why their portfolio might be down and why sticking with an investment plan pays off in the long term, Nugent said.
And if anyone still feels the need to talk to a real human being, they can always pick up the phone and make an appointment with a registered portfolio manager, he added.
And more online investor profiling tools are on the way. I was contacted by syntoniq and was given access to complete their investor profile behavioural analysis. It’s much more in depth than a typical online questionnaire and it would make a wonderful accompanying piece that might enable Canadian Digital Wealth Managers to uncover when a client is investing outside of their comfort level or has the propensity to react emotionally to market volatility.
I completed the questionnaire and was more than surprised at how syntoniq nailed me as an investor. It identified what I know to be my potential weaknesses and even the investment mistakes that I’ve made over the last decade or more. I’d suggest that investment firms, traditional or digital give this tool a spin.
Technology can be an enabler to allows clients to invest in a more cost-effective manner. I’d also suggest that technology can be a wonderful enabler that allows ‘Robo’ Advisors to better manage the behaviour of their clients. Of course a dedicated traditional advisor can do a wonderful job in preparing clients for market volatility and for helping clients navigate market corrections. There are many good traditional advisors. But I know that the traditional advisory path has failed most Canadians. They are being sold to, not coached.
In the next meltdown, when market push comes to market shove, my money is on the Canadian Robo Advisors. I think I will be writing …
Humans 0. Robo 2.5.
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