The Globe and Mail by Lisa Kramer 19 December 2018
One dystopian vision of the future is that robots will take our jobs. Even the white-collar jobs. Apparently no one will be safe.
Whatever your views on the likelihood of that grim prophecy (personally, I like the prospect of a sci-fi world with machines waiting on me hand and foot), there is no reason to fear the advent of machines lending a hand in the context of financial advisory services. So-called robo-advisers have proliferated in Canada in recent years, shaking up the investing landscape, primarily in good ways.
Truth be told, the robo-adviser moniker is a bit misleading in that no actual robots are involved. (Sorry, C-3PO.) The label likely arose out of the fact robo-advisory firms use computer-based algorithms when initially matching investors with the appropriate asset allocation. They do so based on inputs such as risk tolerance and investment target date. Once this individual sizing is done, the algorithms direct your money into well-diversified pools of income-generating assets, saving you from chasing trends and playing hunches on flashy plays such as cannabis stocks and bitcoin.
Disclosure: I am such a big fan of the robo-advisory investment approach that I am an advisory board member for – and an investor in – the Canadian robo-adviser firm Justwealth.
My enthusiasm for the robo-advising approach in general derives from its many appealing features. The products on offer by robo-advisers tend to be passively managed, usually involving the use of exchange-traded funds, which are typically less costly than actively managed portfolio products, including most mutual funds. Often there is no minimum balance requirement at robo firms, meaning it’s easy for most anyone to get started pursuing their financial goals. Some robo platforms also incorporate insights from behavioural economics, “nudging” investors toward good outcomes, for instance, by setting up automatic contributions.
Don’t get me wrong; robo-advising is not for everyone. Many people crave the human touch and so may balk at the idea of investing with a robo-adviser. While one can speak to a live representative for basic financial advice at any robo-advisory firm in Canada, some people may require a more in-depth, tailored consultation than the typical robo provides. For those individuals, the “hybrid” solution is a worthy alternative, where an independent financial adviser offers umbrella services that may include complex tax planning and hand-holding through turbulent times, all while sub-contracting the nuts and bolts of portfolio management to a robo-advisory firm.
The annual cost of the hybrid solution comes in somewhere between the low cost of a pure robo-advisory option (which is usually around 0.5 per cent of assets under management) and the high cost of a full-service financial adviser who steers her clients’ money into actively managed funds (which can often exceed 2 per cent of the portfolio value). This Goldilocks hybrid option – which usually comes in well below the 1-per-cent mark – is appealing to a broad class of investors, and so many traditional financial advisers are partnering with robo-advisers, putting the hybrid solution within easy reach.
The stereotype is that millennials are most likely to embrace the robo-adviser model. While the younger cohort of investors is certainly well represented in the robo clientele, the average is closer to middle age. This is surely because low-cost passive diversification appeals to all shapes and sizes, and those of us with a few years of experience under our belts certainly recognize the merits of avoiding costly behavioural mistakes that can arise in self-managed portfolios. Indeed, being human, mutual fund managers and full-service financial advisers can also be subject to biases and investing blunders. In contrast, the passive index-investing approach of robo-advising is, by design, immune to many of the pitfalls that arise when financial decisions are made under the influence of human psychology.
Canadians have collectively poured billions of their hard-earned dollars into robo-advisory investment products, and while the sector still represents a sliver of the overall asset management industry in Canada, it is growing quickly.
In times of market turbulence, many investors find themselves prone to making emotion-driven decisions, which can be harmful to the bottom line. Many retirees cashed out of the market in the depth of the stock market crash 10 years ago and stayed out. They missed the market rebound and many are consequently working low-paid service jobs well into their golden years. Investing with a robo-adviser, especially under the hybrid approach, can provide a buffer between emotions and decisions, which may appeal to investors seeking a smoother path toward achieving their financial goals.
Lisa Kramer is a professor of finance at the University of Toronto.