Electric Sheep

 By Guest Blogger Doug Rowat

Those roboadvisor commercials are cute: Investors bantering with the camera and playfully debating whether to dip their timid and bewildered toes into capital markets. Their lack of understanding of volatility is almost palpable. But after this past quarter, I suspect that those investors, who are apparently real, are laughing and joking a lot less. Creating wealth, it turns out, isn’t simple after all.

But, despite the recent market volatility, there’s no denying that roboadvice has a bright future. A 2017 Deloitte report on the roboadvisor industry notes the following:

There are currently more than 100 roboadvisors in 15 countries as of today. The market in 2020 is expected to account for $2.2–3.7 trillion of Assets under Management (AuM). This figure increases to $16 trillion in 2025, which would account for a larger AuM than Blackrock.

But before we conclude that the AI takeover is nearing completion, Deloitte also notes that, at present, the roboadvisory industry only accounts for less than 1% of the world’s private banking and wealth management assets. Still, roboadvice is a growing presence, which we witnessed here in Canada last month when our biggest bank, RBC, announced the launch of InvestEase. RBC now joins BMO and Toronto-Dominion Bank in offering some form of ‘robo-guidance’ to clients. Clearly, the big Canadian banks are starting to take a look at the shifting trends in wealth management and are taking direct aim at Wealthsimple, which is the current market share leader in Canada, with roughly US$2.5 billion in assets.

So, investors are clearly finding value in roboadvice and I agree that it has merit. Smaller clients (InvestEase has only $1,000 minimums, for example) deserve low-cost investment advice and, as most roboadvisors use ETF platforms, I like the avoidance of expensive and ineffective mutual funds. (The latest SPIVA research, as a reminder, shows that 93% of Canadian large-cap mutual fund managers have underperformed their benchmark over the past year.)

However, in many other respects, you get what you pay for. As many of these roboadvisor platforms are relatively new to the market the effectiveness of their algorithmic active management, particularly in volatile markets, is unknown. The roboadvisor models remain largely untested.

Also, though many roboadvisors offer some form of human support, the experience level of these humans is questionable. I called InvestEase, for example, and asked what the minimum requirements were for their ‘portfolio advisors’. I was told that the humans manning the phones require a minimum of the Canadian Security Institute’s (CSI) Chartered Investment Manager (CIM) designation and two years of investment industry experience.

Now, I have great respect for the CSI and its ongoing efforts to educate investment industry professionals and I personally have the CIM designation; however, I know that it’s not enough. It consists of only three CSI courses. At this point in my career I’m up to 10 CSI courses and there are still many areas of investing that I’m unfamiliar with. Further, two years of investment industry experience means that you’ve lived through ZERO bear markets, never seen the Cboe Volatility Index (VIX) rise above 40 (as a point of comparison, it hit almost 80 during the financial crisis) and have never seen the ugliness of a recession. For the most part, over the past two years, at least as far as North American markets and economies are concerned, you’ve only witnessed sunshine and lollipops. Personally, I’d want my financial advice to come from someone old enough to at least know which Eagle rocks the guitar solo in Hotel California.

But perhaps my biggest issue with roboadvisors is the limited, and often self-serving, selection of ETFs made available for investment. RBC InvestEase, for example, offers only seven ETFs total and they’re all, naturally, RBC products. In a universe with more than 600 Canadian-listed ETFs supplied by more than 30 different ETF providers, this is an incredibly restrictive lineup. Earlier this year we correctly anticipated an increase in volatility and added a low-volatility Canadian equity ETF to most of our client portfolios. It has spectacularly outperformed the broader Canadian equity market. RBC InvestEase offers no such low-volatility ETF equivalent.

In the end, roboadvisors are a flawed yet still reasonable option for investors; however, there are other options. For instance, a highly experienced, devilishly handsome, full-service financial advisor.

How’s that for a commercial.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.