When Michael Katchen was first looking into investing, he says he wanted something that “made it really easy to get set up in a great portfolio and stick to it over the long term at a reasonable cost”. He couldn’t find it.
To that end, he started a company called Wealthsimple, which offers automated investing and portfolio rebalancing. Sometimes referred to in the media as “robo advisors” or “advice lite”, it’s an approach that North Americans are starting to see more of and that traditional financial advisors are wary of.
The model for this format is California’s WealthFront, which describes itself as an “automated investment service”. A similar company is Toronto’s Nest Wealth, a subscription-based service that assembles portfolios of passively managed exchange-traded funds (ETFs) with appropriate asset allocation and regular rebalancing. Wealthsimple combines automated portfolio management with the services of real, human financial advisors (called “wealth concierges”).
The high fees that accompany most funds motivated Katchen to seek something else.
“Canadians pay the highest investment management fees than any developed country in the world,” he says. “It’s a startling figure. The average mutual fund equity management fee in can is 2.4 percent. That is outrageous.
“The reality is Canadians aren’t getting better services or better performance as a result,” he adds. “There has to be an alternative.”
Here’s how the service works. People speak with an advisor about goals, life stage, and risk tolerance to set up a portfolio, which is automatically reviewed and rebalanced over time. Wealthsimple charges an annual management fee of 0.35 to 0.50 per cent of assets depending on the account balance. Other fees are those that are embedded in the investment products in a portfolio, which Wealthsimple claims to average 0.25 per cent, and currency conversion.
Katchen disdains the term “robo advisors”. “Every client has a dedicated advisor that they can call and talk to, a real human,” he says. “In terms of trading, rebalancing. optimizing for taxes, all that stuff is better handled by software….In terms of rebalancing, good advisors will do this once a year; some will do it every quarter but very few do that. We monitor portfolios every day.”
Toronto fee-for-service financial advisor Heather Franklin says that people considering this type of service need to do their due diligence.
“As in all matters related to investing; the consumer must or should be fully aware of what they are investing [in] and with whom they are investing,” Franklin says. “Furthermore, what are the security protocols, safety of actual monies, safety of information, and so on?”
Franklin says automated investing services may be a good fit for those who considering themselves tech-savvy and DIYers but that they may not be for everyone.
“Is it really possible for an algorithm to determine someone’s financial ability to take risk while determining and considering the emotional behaviour and ability to take risks?” she says. “This is definitely one area in which a financial planner or advisor has a distinct advantage over a computer program.
“Many people seek out those who can advise them on more areas of a complete financial plan, such as best use of tax-exempt accounts like RRSPs, TFSAs and RESPs, not just make suggestions based on a computer program and find the appropriate slot,” she adds
Retirement and investment planner George Christison, founder of B.C.’s Investing For Me, says people do indeed need to read the fine print for things like trading commissions. From his perspective, investing is all about trust, something that so-called robo-advisors may or may not be able to develop.
“The vast majority of investors need to have trust, first in the institution handling their money and second in the individual helping them with their transactions, whether it’s a broker, account manager, or personal banking representative,” Christison says. “An individual investor that hires a full-service paid Advisor does so because they want to know that a real person, backed by a realcompany, is handling their savings and investments.
“They only feel confident when they know a real person, when they have personally met and spoken to a real person,” he adds. “Some have full trust and faith in the company…. whereas individual investors that already use the services of a discount brokerage firm are already comfortable with technology and going it alone when it comes to their savings and investing.”
Christison also maintains that automated rebalancing is only appealing for investors in a rising stock market.
“These services often die a quick death in the first bear market that comes along because investors don’t like the fact that they don’t have anyone to hold their hands or talk to when the market values of their investments are falling,” he says. “And for most investors, they can’t stomach the thought that their safest investments are being sold to buy losing investments, which is what happens when automatically, mechanically rebalancing in a bear market.”