Many people employed in the financial industry are aware of the term “robo-advisor”, but for the average Canadian, this term probably conjures a range of possible images, likely with some kind of science fiction twist. Perhaps the simplest definition of a robo-advisor would be an online financial advisory service. While this type of service is still relatively new in Canada, the industry has been growing at a phenomenal rate in the United States for the past few years and is sometimes associated with the broader “fintech” industry. Fintech is simply a reference to companies in the financial sector that are using technology to simplify the process and reduce costs for traditional financial services like lending or currency exchange.
There are a few reasons why it is fair to say that robo-advisors are technologically advanced compared to traditional investment options:
- The registration process is completed online and uses an algorithm to determine your portfolio
- Almost all paperwork (initial and ongoing) is completed and distributed electronically
- Financial transactions are fully encrypted and completed electronically
- Websites are the principal hub of client resources and communication
- Client access is generally available 7/24/365
These technological advantages provide the framework for a far more efficient and convenient client experience compared to traditional investment options. No more travelling to a bank branch to wait for a sales rep between the hours of 9am and 5pm. No high pressure sales tactics to sell you insurance or other financial services. No mountains of paperwork and endless signatures on legal forms which you are given on the spot with no time to read first. By working with a robo-advisor you can take care of your financial affairs whenever you want, wherever you are. It is also worth mentioning that robo-advisors typically charge about one-third to one-half the fee as traditional investment options.
So what’s the catch? Well, as a pre-requisite, you need to have access the internet to be able to use this type of service and it would probably be a good idea to have a bit of experience browsing websites and using email. Additionally, if you are the type of person that absolutely must speak face-to-face with your investment representative, then a robo-advisor is not right for you.
The five technological advantages mentioned above are pretty much universal to any robo-advisor. But, there are a number of factors that differentiate robo-advisors and the irony is that it is the humans who create the robo-advisors that make the difference! The websites and processes that define how the robo-advisor operates must be designed and programmed by humans. Emphasis could be placed on processing speed, bells and whistles, a beautifully designed client statement, or a robust investment process. Furthermore, even though you may not meet someone from a robo-advisor face-to-face, there are varying degrees to which you will interact with the people behind the technology, ranging from non-existent to frequent.
How can you evaluate the quality of human intellectual capital behind each robo-advisor? Take a close look at the people running the robo-advisor and review their experience and qualifications. Determine if they are able to handle complicated financial portfolios, or just accommodate simple accounts. See if they are able to offer financial planning or other value added services. Find out how many different portfolio options are available and ask yourself if these portfolios seem appropriate to satisfy your specific financial goals. Look at the underlying investments used (Exchange Traded Funds or ETFs) and see how many different ETFs are used and how many different ETF providers are used.
James Gauthier, Chief Investment Officer of Justwealth, offers his perspective on technology and the human factor for robo-advisors:
“We use technology to improve convenience to our clients and to make the investment process more efficient, but all investment decisions are driven by the expertise of our investment professionals. The algorithm that determines our client portfolios is extremely complicated since we have over 60 different portfolio options, yet we ask about the same number of investment questions as most other providers who only offer 5 or 10 portfolio options.
Despite our best programming efforts, quite often in follow-up conversations we have with our clients, we uncover additional information or take into account other factors that the algorithm does not which causes us to recommend a portfolio different from what the algorithm generated. So far, this happens about 15% of the time. Taking the time to fully understand a client’s overall financial picture is critical to getting each account invested in the right portfolio.”
To summarize, robo-advisors take advantage of technology to offer investors a low-cost investment option with superior convenience. One key thing to remember is that this is still an investment, so take the time to make sure that you have confidence in the investment professionals behind the robo-advisor!
Written by Andrew Kirkland, President of Justwealth