In an article in Canada’s Financial Post, author Jonathan Chevreau discusses a study by Boston-based consulting firm Dalbar that used 45 “mystery shoppers” to assess ten Canadian-based robo-advisors. They found that some platforms are falling short on service expectations, which creates “significant reputational risk”.
Chevreau, the CFO of Financial Independence Hub, explained that the mystery shoppers reported a number of different service issues. The most serious ones were related to onboarding, which in my opinion, is the most important process in the entire roboadvisor experience.
If a new investor experience problems opening their account, it can turn them off from the roboadvisor very quickly. And since most B2C digital advisors market themselves as being simple and efficient, any blips in the process can drive prospective clients to click over to a competitor.
During onboarding, all clients must complete a risk tolerance questionnaire (RTQ) that generates a risk score and assigns them to a corresponding model portfolio. Chevreau claims that:
“Robos have a “high degree of personalization” in creating portfolios generated by risk-assessment questionnaires.
This statements clearly confuses the concepts of risk assessment questionnaires with that of portfolio personalization. No matter how elaborate the list of questions presented during the robo onboarding process, the algorithm can only place the user in one of just a few available risk buckets.
Canadian robos might offer a greater number of pre-packaged investment models, but that is not the same as a truly customized portfolio. (See How Risk Tolerance Software Is Disrupting Wealth Management)
Watch Out For Bells and Whistles
As more and more digital advisors enter the space and watch helplessly as Vanguard and Charles Schwab hoover up the lions share of assets, the pressure is on to find new ways to distinguish themselves from the crowd. Adding new features can create a buzz around their service, increasing the number of new users and encouraging them to bring in referrals. However:
[Additional] digital services speed sign-ups, but “add friction” if not well monitored. Several firms encountered “serious technical and logistical challenges” using live chat. It “creates an expectation of ‘instant connection’ that many robo-advisors were unable to meet.”
Live chat is a service I have seen rolled out by B2C roboadvisors as well as B2B robo-platforms. It is already table stakes for most retail shopping or other consumer-facing sites and can offer sales and technical support 24/7. Especially with a product like investing, which most consumers either do not understand or find boring (or both), having a live person to answer questions immediately can greatly increase the conversion rate.
Being unable to meet consumer expectations is unacceptable with something as simple as a chat function. How can they expect to deliver on their promise to help clients with a retirement that could be 30-40 years away? Lesson learned: do not add bells and whistles if you cannot guarantee they will work as promised. (See How the RoboAdvisor Renaissance Pushed the Industry Out of the Dark Ages)
Canadian Robos Pricing Themselves Out of the Market
My biggest surprise from this article was that there are ten Canadian-based roboadvisors! At least, there are ten companies that call themselves roboadvisors. Whether they actually have any assets or will still be around by the end of the year is questionable.
Two of the more well-known firms are WealthSimple and Nest Wealth.
WealthSimple reported $400 million in assets, as of Dec 2015, which is not bad considering that they only launched in 2014. However, there have been no updates provided in the last ten months. In this industry, no news means bad news! Their asset growth has either stalled or has been going down. It does not look good for a startup to go from phenomenal growth to no growth in such a short time.
Nest Wealth is taking a different approach to fees. Instead of a single asset-based price, they have three flat, monthly fees based on asset ranges:
While this may be simpler for investors to understand, it is by no means a bargain for most of them, since they are skewed to the low end of the range. The average account size varies across the roboadvisor space as do their fees. But for accounts under $150,000, Nest Wealth is significantly more expensive than most of the competition.
While there is no public data on Nest Wealth’s average account size, here is the difference of what investors would pay annually:
As this table shows, for account sizes under $100,000 or so, investors would pay over double the fees at Nest Wealth as they would at the two US robos. Unless Nest Wealth has an amazing marketing plan to attract higher net worth accounts, I expect them to have to reduce their fees significantly in order to continue attracting assets.
Chevreau notes that robos are especially popular with Millennials by citing WealthSimple, who based their entire marketing campaign on that client segment. While advisor-less investing does appeal to the younger generation, some robos are reporting increasingly larger percentages of their AUM coming from older investors.
Betterment’s Stein says that 30% of their assets are from clients 50 and up. Personal Capital‘s average client age is 45, probably the oldest among the top robos. It seems that low-cost, passive investing has value at any age.
“The world is more than just Millennials,” is the opinion of Andrew Rudd, the founder of Advisor Software, Inc. Roboadvisors must focus on a broader demographic in order to become profitable, he suggested. (See “Robo-Advisors Can Not Live by Millennials Alone: ASI’s Andrew Rudd”)
In my opinion, the true issue here is not reputational risk as mentioned in the article, but performance risk. Low fees aside, robos share the same predicament as traditional financial advisors. It’s impossible to beat the market quarter after quarter. Human advisors address this shortcoming by offering value-added services, including estate planning, trusts and insurance products. Robos do not have the same range.
That is not to say that technology can’t help investors. For example, Betterment has a unique feature that displays the projected tax impact when a user tries to change their investment model. As a result, 70% of clients who initiate a model change do not complete it after seeing the increased taxes the change would generate.
Every B2C roboadvisor is based on the premise that low-cost, passive investing is the best option for the majority of investors. As long as this premise holds true, the industry should expect continued growth. Whether this holds true for Canadian roboadvisors as well depends on how well they execute and deliver on their promises to their clients.