This question was asked this week by Robb Engen the author of the more than popular blog Boomer and Echo. Here’s the post Can Robo Advisors Hold Up In A Downturn?
The question mostly leads to the behaviour of the investors who have embraced the digital wealth managers that often are addressed as Robo Advisors. That Robo moniker is somewhat misleading though as all go these digital wealth managers are quite human. There is advice and human contact, aka human advisors available at all of the Canadian Robo Advisors. Certainly the level of advice and planning and customer service varies from shop to shop that’s why it’s important for you to ‘know your Robo’s’.
Past evidence suggests that the Robo-advised investors will demonstrate better behaviour (compared to the typical mutual fund investor) in periods of market volatility and downright nasty stock market corrections. The reason for that is that at least they complete an online investor questionnaire that will gauge their tolerance for risk. At many of the digital wealth managers the investor will then be required to communicate with an advisor before they proceed.
Most Canadians investors simply purchase high-fee mutual funds from their bank or through the well-known ‘advisor’ firms that are the mutual fund sales tentacles that go by names that we know all to well. Given that it’s RSP season you can again watch their endless television commercials – they can afford to run tens of millions of dollars of ads thanks to those high fees that Canadians fork over. What’s ‘funny’ is that in those ads they actually show the client in the new $250,000 yacht enjoying their retirement. In reality it’s not the client that gets the yacht. The client gets to pay the highest mutual fund fees in the world.
At the big banks and credit unions and high-fee mutual fund sales offices, the risk tolerance level of investors is a passing thought. The advisors are there to sell. They sell what they are told to sell. The banks and sales offices make more from stock (equity) funds compared to bond funds and GICs so you can guess how the monies are invested. When I was an advisor at Tangerine Investments hundreds upon hundreds of Canadians showed me how they were invested with other banks and those well-known mutual fund advisor houses. It’s not pretty out there. Regardless of the client’s risk tolerance level many or most were in very stock-heavy or all-stock portfolios.
When I asked clients if the risk level was ever discussed or if there was a conversation about stock markets and market corrections the answer was almost exclusively no. It’s my conclusion that there is mostly no risk assessment being performed with the traditional big house ‘advisor’ route.
At a Robo Advisor You Complete An Investor Profile and Risk Assessment
An online risk assessment can be very effective. Tangerine was the first digital wealth manager in Canada with the worst launch date one could have picked, January of 2008, just months before the stock markets fell in the range of 50%. That said, there were no negative outflow days. Investors kept adding monies through the correction.
Yes the Robo concept has been battle tested.
Again, at least the questions are asked. The risks are clearly addressed. The risks might be gauged in a few ways, demonstrated in pictures and words. The simple question is often asked, ‘how would you feel if your investment dropped by 30%?’. Risk tolerance is certainly about how it would feel, and what would you do in a major market correction?
Here’s an example from Nest Weatlh and their online risk questionnaire.
And again Robo’s will often and also display the risks in graphic form to demonstrate the risk-return proposition. In this chart Justwealth asks investors to select the most appropriate investment path or journey. Not only that, with Justwealth, before you invest your file lands on the desk of the Chief Investment Officer.
Some of the digital wealth managers also have tools that can monitor investor behaviour on an ongoing basis. The risk assessment is not over on the day that you get invested. They can spot a jittery investor. The digital wealth managers are also very active with robust blogs and ongoing communication with their investors.
Index investors were tested in 2018, they passed with flying colours.
In my recent article Canadian ETF Investors are Sitting Comfortably in the Sweet Spot I showed how those who embrace indexing by way of ETFs exhibit better investor behaviour. In the modest market correction of 2018, mutual fund investors were bailing (as per usual) and on the other side of the investor behaviour coin money continued to flow into ETFs. Those investors who are aware enough to embrace index investing are likely more aware of basic investment principles and market risks. The ‘indexing world’ comes attached to volumes of investor education from Vanguard to iShares to the digital wealth managers.
Better investments Better behaviour. Better long-term results.
On Findependence Hub This Advisor Suggests Robo’s Will Fall Flat.
Here’s Why Customizing A Personal Portfolio Matters by David Miller a Certified Financial Planner. I agree with much of what David writes but it appears to me that he has not researched the Canadian Robo Advisor landscape. No one should discount the value of great advice at the right price. That said, advice is available at many of the digital wealth managers. One can even access that fee-for-service advice at a shop such as ModernAdvisor. And for so many Canadians in the accumulation stage, they have a simple arrangement will little tax planning required. They simply need sensible lower fee investments for their TFSAs and RSPs.
More reads for the week.
Special thanks to Mark Seed of My Own Advisor who interviewed ‘moi’ in a post that details my personal financial journey, it is entitled Cut the crap – smarter investing and saving is here.
On that risk front here’s my first post for the Tangerine Forward Thinking blog. Don’t ignore bonds just because the yield leaves much to be desired.
For the self-directed dividend investor front Mike, The Dividend Guy offers that High Yield Does Not Equal High Returns.
And on the when to claim your CPP and OAS this post from Bonnie-Jeanne MacDonald on the Globe & Mail suggests that delaying CPP from age 65 to 70 might net you a 150% boost. That said, on moneysense, and in a Jonathan Chevreau article Financial Planner and Accountant Ed Rempel suggests that if you’re a stock investor you should take CPP early. It might come down to ‘are you a stock or are you a bond?’
Thanks for reading.
Reach out with questions and ideas. Dale at firstname.lastname@example.org