In my last blog post I described the challenge posed by robo-advisors to the bank dominated wealth management industry in Canada. Here I share observations from my recent report, Thawing Market, The Growth of Robo Advice in Canada, while exploring the implications for other markets as well.
The robo advisory business in Canada lags several years behind its US counterpart, but in terms of learnings and understanding, it is catching up fast. This trajectory reflects the natural development of the robo learning curve as well as economic, regulatory and demographic factors common to Canada and other developed markets. These include a low interest rate environment; a graying population and regulator umbrage towards practices that long have defined the wealth management business.
The Regulators Are Talking to Each Other
Let’s start with the regulators, who are clearly are speaking to each other across borders. In the English speaking world alone, the UK and Australia have banned commissions, while Canada and the US have essentially gelded them.
Directives aimed at conflicts of interest and revenue sharing represent a worldwide tailwind for passive instruments (such as ETFs) and the robo advisors that offer them. In Canada, the high fees charged by active mutual funds have battered those older and affluent investors least able to afford them.
The interest rate starved Canadian banking sector, which accounts for a large part of mutual fund sales, can no longer count on the willingness of consumers to pay 200 plus basis points for a fund. Like the citizens of the defunct East Germany, they’ve looked over the proverbial Wall and seen a better way.
Small but Mighty
In dollar terms, the robo advisory business in Canada is miniscule. But the modest scale of the business belies a complexity of outlooks and approach.
Canadian regulation presumes portfolio oversight by a real life human being. In practice, this means communication from a dedicated advisor to confirm the suitability of the client portfolio, and to ensure the client understands the risks. While communication can be as basic as an email, it appears that advisors will soon be required to pick up the phone and call their clients, or at least those populations (such as the 65+) in need of more tactile support.
All It Takes Is a Phone Call
This requirement represents an alternative to the binary lens through which US automated advisors have played the market. Their worldview has been black and white (i.e., the advisor-assisted “hybrid” model versus “digital only”) and their messaging shrill if not patronizing (“investors need the guidance of an advisor”). Pure play robos have also become more dogmatic. Remember when Wealthfront used to talk about its brainy investment committee led by Burton Malkiel? This message has since been subordinated to talk of APIs and algos.
Instead of using the concept of human engagement (or lack thereof) as a litmus test, or as a cudgel to bash other models, maybe US automated advisor could acknowledge the robo shades in between black and white? The Canadians, in their temperate and accommodating way, appear to be doing just that.