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Robo-advisors poised to lure investors from brick-and-mortar banks

Robo-advisors may not have cute faces like Pepper, but they can save you some money on investments.

Robo-advisors – online wealth management services providing automated, algorithm-based portfolio management – are a go-to for casual millennial investors looking to grow their wealth, but with new fee disclosure regulations coming into play this month, these outfits could soon see even more people taking advantage of the tools.

As of July 15, the Client Relationship Model Phase Two (CRM2) policy implemented by the Canadian Securities Administrators came into effect, requiring wealth managers to give investors a breakdown of the fees they’ve paid and how much compensation that dealer or advisor received for the products and services provided. That includes all the arbitrary hidden costs like service fees, referral bonuses and embedded commissions on investment products.

“I think it is a good thing – people should know what they’re paying,” says Nathan Parkhouse, a chartered investment manager and founder of wealth management firm Parkhouse Financial. And for the wealth managers who are maximizing returns for clients, the transparency will help prove their worth.

In a lot of ways, the surge in interest amongst Canadians – 77 per cent say they’re open to receiving robo -advice according to a recent survey of 1,200 by Accenture – is being driven by transparency, explains Parkhouse.

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“Millennials are a lot less trusting, they rely less on individuals… in the same traditional way a 60-year-old wants to meet somebody in person, they want to look them in the eye, a millennial isn’t used to that,” he says. Essentially, if they know they can go out there and do it themselves, why pay another exorbitant fee to do so?

It’s a mindset robo -advisor firms have capitalized on over the past few years with 11 new online portfolio managers starting up, hungry to etch their place in the baby-faced market. Toronto-based Wealthsimple, for instance, has already wooed investors with fees sitting at $8 for a $25,000 investment and rising or lowering dependent on how much you invest. The company boasts 20,000 customers.

What’s missing

“The con with the robo -advisor and major pro for third party advice is the human factor – it’s the advisor getting to know what it is that’s important to you and helping you stick to those goals regardless of what flavour of the month product comes out,” says Parkhouse. That, he says, is where the value for dollars comes in. “Robo-advisors to me are really the new discount brokerage with a modicum of planning.”

Which is why he suspects robo -advisors are less likely to carve away market share from wealth managers and more likely to capture customers who would otherwise visit an investment advisor at their bank.

“The people who say ‘I’ve got a few hundred bucks a month and I’m just getting started and I want to do this and learn on my own,’” says Parkhouse adding that full service advisors generally aren’t as keen to take on the smaller accounts worth $100,000 or less, given the higher costs of running their own firms including having a team of associates and the overheads of office space.

“But wealth assets are growing… there are newer players in the market, millennials with jobs that are now starting to accumulate wealth they never had before,” he says pointing out that even with the new fee disclosure rules and the shakeups that could bring, there’s quite literally plenty of wealth to go around. “The winners are everybody – I think it comes down to where each individual person sees value for their dollar.”