How robo-advisers are changing the way financial planning gets done

The financial planning business is going through a sea change as new disclosure rules on compensation have helped create a flurry of robo-advisers — computer programs that make the investment decisions for you

New rules on fee disclosure for financial advisers prompt change and alternative approaches

Robo-advisers are computer programs that adjust investment portfolio goals based on risk profiles of users.

Greg Pollock is keeping his cool.

Pollock represents 12,000 financial advisers, some of whom are sure to lose clients and business as new rules come into place, revealing the hidden commissions and fees that siphon away precious savings.

At the same time, a raft of new robo-adviser firms have launched in Canada, offering customized portfolios at a fraction of the usual cost.

But Pollock isn't worried. 

"Sure, there will be some surprises for clients," says Pollock, who heads Advocis, a trade association for independent advisers. "I think some will scratch their head a little bit and say, 'I didn't really know how much I was paying or how it was being paid.' But I think at the end of the day the vast majority are going to hang on to their advisers."

Changing business

Consumers may be wary of the term "robo," but new Canadian online firms such as Wealthbar, NestWealth and Wealthsimple are eager to explain that their clients can speak to real people when needed.

It's the portfolio that's designed with software. And the lower cost of robo-advice appeals to the cost-conscious among us: fees run at just half a per cent of the value of a portfolio, versus two or even three per cent with regular advisers.

"Generally when I talk to Canadian investors, they have no idea that our country's mutual fund fees are among the highest in the world," says Lisa Kramer, who teaches finance at the University of Toronto's Rotman School of Management.

"And they also tend not to understand that they are literally paying their mutual fund company as much as three per cent of the value of their portfolio each year, whether their holdings go up or down in value," says Kramer. "So I expect we'll see some shock waves as the fee disclosures start to circulate."

Fees can add up — fast

Those fee disclosures will come soon, thanks to new rules that will be in place by July. The new client relationship model ordered by regulators is intended to clearly show consumers how much they pay to invest through an adviser. And the money they hand over won't be shown on statements as a percentage. The actual dollar figure that comes out of their account will be spelled out, something industry insiders say is bound to make a bigger impression.

"When you move to a dollar figure, it resonates in a different way," says Philip Yuzpe, president of Sentry Investments, a mutual fund company. 

While it's not clear exactly how investors will react to this newly highlighted information, it already appears the change is sparking a heightened level of competition. That could mean better prices and service for consumers.

"A change like this that sweeps across the industry is going to trigger the competitive notions of the people who provide product," according to Sandra Kegie, the director of the Federation of Mutual Fund Dealers. Her group represents the firms that distribute investment products, as well as 14,000 licensed advisers. 

New consumer-friendly strategies

Some of the consumer-friendly moves in the industry so far include:

  • Mutual funds lowering their fees in order to "make life easier" for advisers.
  • Traditional advisers starting to work with robo-adviser firms to lower their costs for consumers.
  • A dramatic increase in the number of advisers moving away from "embedded" compensation to a fee-based approach that's more transparent. 

Many financial advisers say they've been preparing for the changes. Pollock's Advocis group launched an education program three years ago, telling advisers that they should be sure to talk to clients about the value of their guidance.

Pollock is happy to count off the services his members offer that robo-advisers don't. "Tax strategies, insurance strategies, succession planning," he lists. "It's important to talk about that value you're providing as a professional."

But Pollock acknowledges Advocis hasn't polled its members to find out how many financial advisers are taking steps to rise to the competition challenge. "I can't tell you how many are confident or prepared," he says.

Room for both

The robots and the humans aren't necessarily at odds in the marketplace, however. Collaboration between the two is about to reduce costs for some consumers.

"We've been approached and are actively in discussion with many independent financial advisers about how we can support their business," says Mike Katchen, founder of Wealthsimple, a Toronto based robo-adviser firm that launched in 2014. 

Wealthsimple and other robo-advisers say a growing number of traditional advisers are keen to lower their cost of doing business and pass on savings to their clients.

And at least one mutual fund company has decided it needs to help the advisers who sell its products. Sentry Investments has lowered the fees paid on its equity-based products and has done away with the restriction on some of its preferred funds, investments that were only available to clients with large portfolios.

"We said why is any client preferred? Let's just give the best pricing to everyone," explains Philip Yuzpe. He says the company began over a year ago to explore how it could make life "easier" for advisers. Some of Sentry's funds that were on the higher end of the price spectrum are now in line with the industry standard.

"Firms that ignore the coming shift do so at their own peril, in my view," says the Rotman school's Kramer.


Dianne Buckner has reported on entrepreneurs for two decades. She hosts Dragons' Den on CBC Television and is part of the business news team at CBC News Network.


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