Will Canadians ever embrace the Robo Advisors in a meaningful way? While the growth rates are impressive the total assets under management is disappointing. The Robo option might be ‘the answer’ for the majority of Canadians but it has failed to attract considerable assets.
There is several billion dollars invested in the Canadian Robo Advisors. That sounds impressive. But that is less than one half of one percent of Canadian retail investment assets. Quite frankly, these digital wealth managers have not caught the attention of Canadians in a meaningful way.
Post: What and who are the Canadian Robo Advisors?
I’ll have to admit that I am more than surprised. And I’m disappointed. It’s my opinion that the Canadian Robo Advisors are THE ANSWER for most Canadians who are trapped in high fee mutual funds.
Of course I am a ‘loud’ cheerleader of this investment option. I worked as an investment advisor for the digital wealth offering at Tangerine Investments. I left the job that I loved to start Cut The Crap Investing.
What’s going on?
Why have the Robo Advisors failed to attract considerable assets? For answers and insights I turned to Josh Book who operates Parameter Insights. Josh and his team are a leading provider of data analytics and insights for the wealth management industry. They consult to wealth management firms helping them modernize for the digital age.
I’ll now turn it over to Josh to provide his thoughts. I will return to wrap things up. Yes, I’ll get the last word. From Josh Book …
The term Robo Advisor – not good.
The term Robo advice is an awful one. It’s confusing. It’s scary. Of course, it’s perfect for execs and media to latch on to because it’s short and draws out emotional reactions. Today where news cycles reach blinding speeds, media and people alike search for those “viral” moments that seem attached to content focused on “unicorn”, “wipeouts”, “wework”, “AI” “Fintech” and on and on it’s easy to lose the forest for the trees. And it’s no wonder that consumers have yet to flock to digital wealth advice firms.
Much has been made of the slow growth of these “robo” wealth advice platforms with ample commentary from execs on all sides – even some who are charged with a digital advice service. One such exec has even been quoted as stating “failure” for digitally led wealth advice platforms based on his firm’s lack of growth after an underwhelming launch approach and a mere 6 months in market!
Too much industry jargon.
The truth is there is a wide array of reasons why consumers and, more noteworthy, their assets are not yet “flowing” to digital wealth advice services. These digital first wealth managers offer less expensive and, in many ways, more elegant and user-friendly approaches to help people save and invest for important life stage landmarks. First and foremost is the wealth management landscape is incredibly crowded – how’s a person to choose? A plethora of firms cite jargon rich feature laden communications about their digital advice services. The trouble is that digital advice or “robo” has not succeeded in grasping meaningful levels of consumer attention.
Robo awareness is on the rise.
While consumer awareness of digital wealth advising is rising it’s still quite low in North America when you consider how familiar one must be to transact with an investment manager. It makes the approach taken by firms in the US such as Acorns and Stash, once considered gimmicky, look genius.
You can have a read of this Acorns review on investorjunkie.
Reports claim Acorns is adding over 100K new customers a month with frictionless savings options and a growing suite of financial service offers. While “AUM” may be lower than levels which grey haired wealth management execs might take notice these firms are actually changing the landscape. That shift will no doubt result in strong AUM growth over time.
A frictionless experience is required.
Consumers are getting ever more discerning about user experiences across categories and wealth is no doubt one that will not avoid the critical consumer eye. Only those firms that continue to innovate on how to engage consumers, (who we know have low financial literacy), to their experiences and then, once captive, provide frictionless ways to provide value will remain in the game.
The Robo barriers.
Some of our (Parameter Insights’) latest consumer data shows the change in barriers to engage with a digital wealth advice platform. This helps to shine a light on the slow movement of assets as well. Notwithstanding that, almost 95% of non-digital wealth advice users report having at least one barrier, but we are seeing some erosion. More importantly, the top five reasons reported by both Canadian and US consumers are telling. Of those that report to “not have enough money to contribute to investing” over 35% of them earn over $100K and/or have over $100K in investable assets.
“Not knowing enough about it” is not surprising to see given the awareness numbers. It is positive to see that this hurdle seems to be eroding the quickest. Which is to say, the times are changing.
This all opens a small window to why asset flows and customer acquisitions to digital wealth advice offers remains somewhat stagnant. The incumbent bank led offers have come to market with little fan-fare providing the easy “I told you so” many wealth execs have been hoping for. But this also is a key component to the story. Investigation and evaluation to how the incumbent led digital advice services have entered the market doesn’t exactly result in inspiration.
If you build it will they come?
If you build it doesn’t necessarily translate to they will come. Established financial services firms lack ingenuity in how they are defining and communicating the value proposition of a digital wealth advice firm which is not endearing consumer curiosity.
The lackluster user experience and product features of many of the offers don’t make it easy for those that have found ways to engage. It is all puzzling.
Will big players give up their big fees?
With established customer bases to leverage and sizable resources at their discretion you wonder if there is a meaningful appetite to transform the wealth business. It’s tough to look at strong revenues garnered from high fee businesses as being potentially cannibalized. Moreover, what happens when customers learn meaningfully about alternatives? Failure to act might not get you fired. Or, it may get you to that pension in a hurry. But it will, without question, put your wealth business in danger of being disrupted.
Take a look in that Robo mirror.
Firms need to take a hard look at their wealth businesses and seek opportunities to integrate across a wealth continuum. Digitally-led advice is a strong enabler to help facilitate across that spectrum. But firms also need to better understand consumers such that they can apply data driven strategies to garner attention and build more cohesive operations that supports a new wealth business model. This in turn will help customers of all wealth demographics in the ways that they wish to be served.
Change the conversation. Change the subject.
In execution this might mean avoiding any mention of wealth management, investing, diversified portfolios or other terms that require a visit to Investopedia.com. It must start by reaching people in their lives with ways to help make those lives better.
Thanks Josh for those incredible insights.
Yes, the mic has been handed back to me, Dale. Thanks so much to Josh Book. There’s much more to come on this subject. And most importantly – what can we do to give these ‘Robo’ advisors some jet packs? Josh has some wonderful research and sharp instincts in this area.
I can put on my branding and communications cap. I might come at this with a unique skill set having been an ad/communications guy, and I’ve talked to thousands of Canadian investors as an advisor. I pressed the right buttons to help many Canadians make that leap from high fee funds to lower-fee index-based portfolios. That was not a difficult task. It’s an easy decision for a Canadian investor with the right information in hand.
That’s why I’m surprised that the Robo’s have not taken over the investment world. But they will, sort of, eventually. One day, Canadians will embrace the Robo Advisors.
If you’re already leaning Robo, but don’t know where to turn, have a have a read of my Robo reviews. And feel free to send me a note. I’m happy to play air traffic controller to help you find the right Robo.
And as this post noted, awareness and understanding is a major barrier. Please share this post with those buttons on the left.
Thanks for reading, and thanks again to Josh.
Do you think that some of the difficulty is a lack of a distribution network that banks and large wealth management firms have? I’m thinking of firms like Steadyhand that have been operating for over 10 years, have a wonderful offering, but still have less than a billion dollars under management. They are really limited by not having a network of people selling theie products.
Hi Devin, you are absolutely right. Most Canadians are advised. It is about the sales channel. It’s a difficult task to build organically. Some of the Big banks could do big things with their Robo offerings. They could do a lot with their one ticket asset allocation offerings. We’ll see. It will also take some pressure from consumer preferences. That puts pressure on banks and other mutual fund providers and sellers to act.
Some banks are more open to this than others of course.
Thanks for stopping by,
Dale
Interesting read. Here’s a question for the Robos: What incentive is there for us middle-aged people with several hundred thousand to invest in your firm? We’ve been through 40 years of boom and bust and high fees and have developed a natural cautiousness with investment promises. Personally, I am on my second Robo and switched because the first one didn’t offer enough online info. I’m now quite happy with the ease of the app and good information and am testing the waters for one year before committing more $. This Robo also offers financial planning for a fee which I like. But for now, the majority of our funds are in GICs which isn’t ideal in terms of rates and inflation. In the past we have held mutual funds and lost $ plus now know our fees were too high. But overall, I am happy with learning about Robo advisors and can foresee investing more next year. However most of my friends don’t know anything about robos and with moderate to high investments are paying too much in fees.
Hi and thanks M-A for dropping by, welcome to the site. I think the Robo’s are a great place for those with several hundred thousand and even well beyond that asset level. And of course, that’s for those who want a managed portfolio. The reason is much the same. Wonderful and simple common sense portfolios with sensible fees. One can also access various levels of advice and planning. I’m glad to hear that you’ve found a ‘Robo’ that you like. I’m guessing Modern Advisor? Ha.
It would be awesome if you could share your experience with your friends and family. This is actually more of a ground game. We get ’em one investor at a time. I found at Tangerine that so many clients came referred by friends. Or my clients would tell me that they brought in many brothers and sisters and friends and cousins and on and on. We’d call them brand ambassadors.
Here I view it as the Cut The Crap Investing Army 🙂
Dale
I think you sort of answered that question within this post. It’s the word robo. It could also be a demographic thing. Younger people might be more embracing of a techy product with that name whereas older people prefer to avoid anything that sounds like a robot and want real person interaction. Can a robot do a better job than me? That and the part where you wrote about income and/or assets in the 6 figures whether that’s true or myth, it could be the perception.
Hi Cheryl. Yes the word Robo is ‘bad’ as per this post and my previous posts on the topic. Digital wealth management is bad too. Folks think they have to be wealthy. You can also do advertising without calling yourself anything, and not that the Robo’s call themselves Robo. That’s rare. As per Josh’s comments they might have to go at it from a lifestyle point of view. Or perhaps goal oriented. Justwealth can own RESP and greater assets management. Some can talk fees (Questwealth) and Nestwealth can relate it to their Netflix-like subscription model.
And more than anything, there has to be more noise.
Robo’s will not typically be for the self directed investor. But some self-directed investors keep accounts to keep themselves honest. To benchmark.
Dale
I find it difficult to find reviews of the annual performance of the various Robo Advisors in Canada. I realize that most have not been around very long. Back-testing might be interesting too. Have the Robo Advisors net returns been posted somewhere so that potential clients can review the returns (think grouping by growth, balanced, low risk conservative or using Tangerine’s mutual funds types etc.)? I see various reviews indicating cost, service perks or advice style. Isn’t the greatest measure of success just the 3 or 5 year returns less the costs? Is it that the returns are almost all identical so the only real difference is cost, advice or perks?
Thanks Dave for dropping by and great question and a common concern or question. I will be doing a post on this, as best I can. The major difference in returns will not be the fees (differences), but the asset allocation and the choice between passive asset allocation and active asset allocation. A few of the Robo’s make moves based on economic or political considerations. Guesswork, if you will.
Those moves and choices can quickly eat up any fee difference of.30%-35%. There are also tax consequences as well for after tax returns, for those invested in non registered accounts.
I would not worry too much about the returns, actually. All of the firms that I cover will have very good returns, they should have. It’s all sensible asset allocation in portfolios that are managed and the fees are quite reasonable. They follow the same overarching investment philosophy.
But I will certainly do ongoing posts on the returns and what drives the differences in returns. Many of them do post their returns.
Dale
Thanks Dale, I look forward to your next posting on Robo Advisors. Of course I appreciate all of your candid remarks and good advice on other subjects too!
Dave
In addition to the points made above, I think a problem is that many Canadians are loyal to their bank channels, and while RBC and BMO offer robo solutions, I don’t see them being actively promoted very much. I have to wonder if the banks are making them available in case the market moves that way, but they make so much more money on traditional mutual funds sold at the branch and their brokerages that they have little incentive to promote them.
I read the Report on Business article about Wealthsimple a few weeks ago and saw they have $5bn in AUM, but when divided by their 175,000 clients, that works out to average portfolios of $28,571, so not very large at all. They have 4/5ths of the sector’s assets so the rest isn’t very large. It’s also interesting to note that the asset allocation ETFs from BMO, iShares, Vanguard and Horizons have just under $3bn in assets now, so not much less than Wealthsimple. With those products, is there really much advantage to the robos now?
Thanks Bart, many do think the big banks have low fee products on the shelf ‘just in case’ or as a retention product for when a client does wise up. That said, BMO is mostly ETFs, they were never into mutual funds in a massive way is my understanding. But I do want to look into what happens at the branch level. And through their wealth channels.
I’d suggest that the Robo’s and Asset Allocation Portfolios are 2 different animals. While the AA portfolios are simple, and wonderful, they are for the self directed investor. An advisor might but them in there from time to time.
For the Robo’s, perhaps we continue on this really good growth rate (shop by shop) but don’t really get that massive tipping point. Maybe we just carry on.
I’m hopefully that we will see some acceleration.
Dale
Agreed Dale! BMO bought Guardian Funds, but you are right, they seem to be more of an ETF shop. After iShares and Vanguard they have the most ETF assets in Canada.
I also agree with your points about robos – they really should be embraced more by mainstream Canadians. I certainly recommend them to people who are not comfortable with DIY investing. The few that have used them all report very positive experiences.
Thanks Bart, for Canadian banks BMO leads the way for sure. We’ll have to see what RBC is up to with their iShares partnership. BMO still has $47 billion or more in their mutual funds as an est/unless I missed a page or two, ha. They have over $60 billion in ETFs and sit at #2 behind iShares. They obviously still earn considerably more off of their mutual funds. But I think they know the future is in lower fee offerings, including ETFs.
Glad to hear that you put friends and family onto the ‘Robo’ Advisors. Again, I do think that is the answer for the majority who are currently stuck in high fee mutual funds. And of course they have their wealth management divisions for those ‘with real monies’.
Dale
You are absolutely correct about banks having the product but not promoting them. Hence TD’s e-funds which you cannot buy in the branch and they don’t even want to talk about them if your lucky enough to find someone that knows what your talking about.
Yes the advisors don’t even know they are there. And they would get in trouble if they were aware and if they were promoting them.
Dale