The rich are different than you and me, F. Scott Fitzgerald once wrote.
It would certainly seem so when it comes to adopting new investing tools. In the U.S., there are signs that wealthier investors are starting to turn toward low-fee, online advice at the expense of higher-cost personalized service.
This so-called “robo-investing” wasn’t on anyone’s radar five years ago. Yet in a recent report, management consultant A.T. Kearney says the phrase will be a household word within another five.
Such services bridge the gap between full-service advice and no advice at all, and they won’t be for everyone.
They get their name from the fact that the companies that provide them operate only online, and use computer algorithms to decide how investors should allocate their money. While the actual portfolios are designed by people, a computer chooses weightings, which are based on how clients answer questions about their age and stage, investing goals, risk tolerance and horizon.
The portfolios are usually a mix of Exchange Traded Funds (ETFs) that are automatically adjusted over time.
In the U.S., the flow of money into these accounts has increased rapidly. Kearney estimates that from a few billion dollars in 2012, the flow hit $50 billion in 2015. That number is still a drop in the U.S. wealth-management bucket, but by 2020, just four years hence, Kearney estimates it will be $2.2 trillion, or about 10 per cent of the pie.
In Canada, there are eight players in this field. The Bank of Montreal became the latest, and first bank, to step in, in January. It’s an interesting move, given that the banks are frightened by the trend. It has the potential to cannibalize their higher-fee wealth management products.
BMO’s SmartFolio has five choices made up of BMO’s exchange-traded funds. The minimum investment is $5,000.
Fees are 0.7 per cent for the first $100,000 invested, or a minimum $60 a year, and decline as balances increase.
By comparison, the fee range for equity mutual funds is between 1.5 and 3.5 per cent.
It should be said that the jury is out on whether computer-based investing is actually any better than the traditional kind. The potential is there, but these services are so new that performance data is hard to come by.
The current market sell-off — which shows no sign of letting up — will be a good test. Computer programs apply rules without insight. A human hand may be better in such situations.
The appeal of robo-advisers, however, is undeniable. They’re cheaper because they invest in indexes rather than stocks themselves. This avoids commissions and fees.
They are also easy to get started, and the client controls the experience. No need to set up an appointment for a face-to-face meeting.
Tea Nicola, CEO of Vancouver-based Wealthbar, says many first-time investors feel intimidated, and so they procrastinate. Wealthbar’s site offers investment insights that can be absorbed at leisure. If customers want to talk to someone, it can be by Skype, an e-chat or email.
Nicola says the typical client is an infovore — curious and looking to learn. “They don’t want to be sold,” she says. “They want to be informed. They like self-education and want to understand, but don’t necessarily want to do it themselves.”
Another draw is that you can start with smaller sums. While Wealthbar’s minimum is also $5,000, others let you start with much less.
Wealthsimple, which is backed by Power Financial Corp., doesn’t have a minimum. Neither does Invisor.
WealthSimple made a splash on your TV screen this past Sunday with ads during the Super Bowl. The message beyond the obvious? We’ve arrived.
Maybe that five-year wait for robo-investing to become a household word is too long.