Could a robot and a credit union paddle the same canoe? Figuratively speaking, of course. No matter how slick the digital interface, behind each one is a hot-blooded, regulation-following financial adviser. I’m referring, of course, to roboadvisers, a newish arrival to the wealth management community.
While our American cousins are comfortable with robotic interactions of a more literal nature, Canadians still expect — and get — a warm body in the decision making hot seat. Nevertheless, the robo-advisers are confident in their ability to woo investors away from traditional services. And some even want to woo credit unions themselves into a collaborative arrangement. But member-centric credit unions like to get up close: should they even contemplate a service that does away with the face-to-face?
Humanity within the machine
“It’s important to remember that the term roboinvesting was not created by the new startups in the space,” explains Randy Cass, founder, CEO and portfolio manager at NestWealth, “but was created to elicit that exact response in some people, that it seems cold, hard and impersonal; clearly they won’t care about me.”
NestWealth is one of half a dozen startups in the new robo-advice arena. Based in Toronto, NestWealth offers a customized portfolio of ETFs in exchange for a flat monthly fee between $20 and $80 per month depending on the size of account. For this fee, NestWealth takes care of asset allocation and rebalancing. Trades are extra ($9.99 each to a maximum of $100), as is the cost of holding the ETF (typically 0.15%).
Cass prefers the term online wealth adviser, or even bionic adviser, to denote the presence of humanity within the machine. “There aren’t any robots in our office. You get portfolio managers and customer success teams picking up the phone every day.” He doesn’t see any conflict between an online model and personalized service. “The customer gets a better solution, at a vastly lower cost and in a more timely fashion. And the providing company takes 90 per cent less in fees. In my opinion, this is the most investor-friendly, wallet-friendly product rolled out in Canada in decades.”
Algorithm or advice?
And the robots? In the U.S., the entire process from signup through risk profiling and portfolio rebalancing is executed by sophisticated computer programs. It’s a mathematical process, which removes the human (and potentially biased) element, and gives the masses cheap access to investments.
“But in Canada things are a little different,” says Tea Nicola, co-founder (with husband Chris) of WealthBar, a Vancouver-based robo-adviser. “Our regulators don’t allow us to algorithmically select people’s portfolios. We still have to have flesh-andblood managers designing portfolios for different risk profiles.” She believes a chief differentiator for WealthBar on the robo-advice platform is its shared values with credit unions. “We are more personal and we talk to our clients much more than other advisers do. We focus on service, so it’s very complementary. I definitely think there are synergies there.“
“The term robo-investing … was created to elicit that exact response in some people — that it seems cold, hard and impersonal … ”
— Randy Cass, NestWealth
WealthBar offers free financial planning for clients starting with less than $5,000, and charges 0.6 per cent (including trades) for accounts up to $150,000. Rates reduce for larger accounts. Low fees and low minimums appeal to first-time investors. Advisers analyze insurance needs for clients a little farther along, and also synchronize sources of income for retirees.
In addition to ETFs, WealthBar also offers private client pooled funds through partner Nicola Wealth Management. Its CEO, John Nicola, is Tea Nicola’s father-in-law. The collaboration, Tea Nicola explains, has allowed both companies access to broader markets, without blurring objectivity.
“Nicola Wealth Management works with organizations and small businesses with a certain minimum of investable assets, and we work with families and individuals who are trying to save for the future. We service the lower end of the market and the retired people who want Nicola Wealth Portfolio, and they use us to distribute their investments in a market that they don’t serve.” Non-bias is preserved by the pricing model: clients pay the same flat fee regardless of which products they choose.
Despite the common belief that robo-advice is a product for millennials, Nicola believes age is not the most important factor in its appeal: “It’s more about the process than it is about product. It’s really about people who want convenience and the ability to communicate with their adviser in small pockets of free time in the day.”
Looking just at the numbers, particularly fees, some robo-advisers could challenge a credit union’s offering. But are people really prepared to offload their financial well-being to a website?
Tech trends and transparency
Kim Thompson, senior vice president of advisory services at Credential Financial, sees the rise of robo-advice as part of a larger trend. Credential, also based in Vancouver, provides wealth management, online brokerage, and insurance services to more than 225 credit unions and independent financial institutions across Canada.
“How consumers are purchasing in all aspects of their life is changing because of the advent of technology. It would be naïve to think that investment management is immune,” says Thompson.
Beyond the trendiness of all-things online, there is another weakness in Canada’s investment landscape that robo-advisers will be seeking to exploit: fee disclosure. Over the past few years, traditional advisers have been shining up their communication habits in preparation for Client Relationship Model Phase 2 (CRM2), which will require investment managers to disclose to clients the dollar amount each paid in fees. Most advisers do much more for clients than simply shake out an asset allocation, but do clients and members understand that?
Read what 150 Canadian advisers reported in Game Changer?
Seventy-five per cent of banks and 64 per cent of asset management firms were concerned about the effects of CRM2 on their business, noted a PricewaterhouseCoopers survey from November 2014. (Credit unions were not specified.) And 75 per cent of banks anticipated client concerns about amount of fees, and half thought clients would be concerned about the value of advice. Interestingly, none of the banks worried about actually losing customers.
David Yan is vice president of wealth management at Envision Financial (240,000 members, $10 billion in assets), a credit union headquartered in Langley, B.C. In preparation for CRM2, he says his organization has stepped up its efforts to promote its broader value proposition when talking about fees.
He explains, “There’s a holistic big picture of relationship-building and planning, and members want that. But if it’s just about fees — here’s the transaction, here’s what you paid — then that’s when you’re going to lose members.”
CRM2’s potential to raise Canadians’ financial literacy will be a positive for most advisers. But could it go the other way, driving business to low-cost digital platforms? “If you haven’t done your job properly, are there members that are going to question fees and move to a discount brokerage or robo-advice?” ponders Yan. “I’d be naïve not to think that could happen. [Robo-advice] will get bigger here in Canada. For us not to do anything would be silly.”
Will credit unions embrace advice-bots?
In addition to upping the profile of services such as estate planning and insurance needs, Yan expects Envision Financial will add an online advice channel as well. It makes sense to have a low-touch option available for the members who don’t want to meet in person. Envision will likely take on this service when it becomes available through its partner, Qtrade Financial Group. Qtrade provides online brokerage services and full-service advice to hundreds of credit unions, banks, and independent wealth advisers across Canada. Like the credit unions it services, Qtrade’s business depends upon giving customers what they want, not what it wants to offer.
Catherine Wood, senior vice president of online brokerage, insurance products and marketing, agrees that credit unions should take robo-advice seriously, but as a complementary new channel, not a cut-rate competitor. “They don’t want a gap in their advice offer. They want to be viable and offer members everything they need for their financial well-being.”
No matter how great the value of a full-service adviser, some members will not need or want it. “It’s no longer about what the company feels comfortable with, it’s how the client feels comfortable,” she explains. “Any organization that is going to prosper in the future needs to meet the client where they are.”
Adding an online-advice channel strengthens the chance of retaining a member through all his or her financial circumstances. “Credit unions want to keep clients so if the right answer for the member right now is robo-advice, we still want to keep them in the family,” explains Wood. “When that client’s needs change, you pull them back into a full-service offer.” Wood says an online advice channel could provide access to the next generation, since clients in the older demographic may look for tools for their techsavvy child or grandchild at home. “There are a number of opportunities, but the main thing is that the member stays in the family.”
What members want and need
To that end, an organization can’t adapt in the right direction without a good handle on what its members care about. In early 2015, Credential engaged its online brokerage clients in focus groups and surveys to create a detailed picture of their needs. Beyond risk profiles and time horizons, Credential sought to understand the lifestyle and values of their online brokerage clients — many of them credit union members. The five-month exercise yielded several “personalities,” but across the board, Thompson says they were excited to see how closely individual affinities aligned with the credit union mission.
“They have the same values as all of us who are engaged with the credit union network,” says Thompson. “It’s a very strong sense of community, of doing what’s right and doing what’s best. They have accountability to a broader household. They want their online investment solution to be fairly simple, and they want to be able to sleep at night.”
“[Roboadvice] will get bigger here in Canada. For us not to do anything would be silly”
— David Yan, Envision Financial
She adds, “I actually think credit unions are well positioned to adapt to new trends because they’re very much in tune with their members’ needs and they’re most inclined to make sure their offering reflects those needs. Often times that can take precedence over the financial implications; meeting their members’ needs is their reason to exist.”
Thompson sees existing online brokerage clients as those most likely to jump at a digital-advice platform. “Those members are already predisposed to buy aspects of their investment portfolio online, but many of them are also somewhat overwhelmed and need a little bit more handholding.”
Digital advice, she argues, is a logical follow up to Credential’s online brokerage offering. “How do you take all that online information in the brokerage world and shift it so it becomes user-friendly? And then how do you shift it so it provides digital advice? Because that’s what clients are asking us for.”
In her view, the success of any digital-advice channel would be dependent upon stellar technology, and that requires a capital investment at the outset.
“As consumers, we have very high expectations of technology. It needs to be simple, intuitive, and do a lot of things very fast, or we’ve lost our patience and we’re ready to move on. To do all that behind the scenes is quite complex because, all of a sudden, you’ve got to move a lot of data very quickly. I think it’s important that in looking at a solution, credit unions are also looking at the technology build. Oftentimes, the collective scale of the credit unions to do that collaboratively is the right route to go.”
Customer service triumphs over tech
Back at Qtrade, Wood cautions that any organization looking to add a digital advice offering should prioritize a top-notch service desk. “If you talk to any people that have had a chance to interact with the robo-platform, they’re very impressed with the technology, but not with other elements such as service desk, that really provide that great end-to-end experience.”
A lot of [robo-advisers] don’t necessarily come from a wealth background; they come from a technology background,” Wood explains. “They’ve built a great tool, but it’s these other elements that make the client experience consistent throughout.”
So maybe the idea of a credit union and a robo-adviser wiggling into the same canoe is not ridiculous, only precarious. Nicola would like to see credit unions find a way to work with new players such as WealthBar rather than against them. “The biggest danger in approaching the roboadvice is to take a concerned or antagonistic stance against it. The market is moving more towards online operating and this style of management, rather than back. Take a collaborative approach and see if we can work together — find a way to leverage both sides of the story. So rather than flinging rotten tomatoes across the fence, let’s break the fence and try to have a BBQ.” ◊