Robo-AdvisorsMary Savona, CFP, MBA

Professor, Seneca College

Agenda

Overview

Competitive Profile

Client Segments

Products and Services

Pricing

Licensing and Credentials

Future Direction

Overview

What is a Robo-Advisor?

An online wealth management service that provides automated, algorithmic

portfolio management, primarily with ETFs.

Portfolios are automatically rebalanced.

Tax optimization is offered to varying degrees

Online service is provided to the end-client and intermediaries (advisors,

employer-sponsored plans)

Select Robo firms in Canada

BMO SmartFolio Nest Wealth

Horizons Model Portfolios

Partnership between the ETF provider and

PUR Investments

Portfolio IQ

Launched by Questrade

Justwealth

WealthBar

Nicola Wealth Management has an

interest

Wealthsimple

Power Financial has an interest

What is the appeal of Robo-Advisors?

For the investor

Ease of use

Online, mobile, advisor support

Set-it and forget it

Low cost

Transparency (fees and performance)

For the firm

Scalable

Enhances advisor productivity

Attracts the tech-savvy Millennials

What trends have given rise to Robos?

Millennials

The online and mobile generation

Comfortable with accepting guidance from algorithms using their data

Shopping (Amazon)

Entertainment (Netflix and iTunes)

Health (Fitbit)

Bad experience with the stock market

It’s Not Fair!

Gen X vs. Millennials: A different stock market experience

Using U.S. market returns, the economist

Robert Shiller calculated that an investor

born in 1980 who invested $1,000 on her

18th birthday would have $1,030 on her

30th birthday, adjusted for inflation and

reinvested dividends. Had she been born

in 1970, just 10 years earlier, the $1,000

investment on her 18th birthday would

have grown $5,400 by age 30.

Source: Morgan Housel, “An open letter to millennials: The

market is your friend”, The Wall Street Journal, Nov. 24, 2014.

Targeting Gen X vs. Millennials

1999

Ameritrade targeting Gen X

https://www.youtube.com/watch?v=e2LSyiYjbcg

2016

Wealthsimple targeting Millennials

https://www.wealthsimple.com/

Wealthsimple: Key Messages

Time in the market, not timing the market

Save regularly today to consume more tomorrow

Passive investing beats active management

Diversification, low cost, asset allocation, rebalancing

Invest conservatively

Knowledge is NOT key to successful investing

Technology will do it all for you

Don’t worry; be happy

“Put your money on cruise control.”*

Take care of yourself

*Source: https://www.wealthsimple.com/why-invest

“Wealthsimple is the

largest automated

investing service in

Canada.”*

What trends have given rise to Robos?

Not just a Millennial Story

Regulatory disclosures driving transparency

CRM: enhanced disclosure of conflicts of interest, performance and fees

Demographics driving need for enhanced advisor productivity*

Average age of full-service client is 62, expected to rise to 70 in next several years; 53% of assets

in the channel held by clients over the age of 65

Average age of full-service advisor is 52; 25% of advisors near retirement control 25% of assets

Retirees drawing down wealth

Retirees have several income sources and account types; tax efficient drawdown is challenging

Generational wealth transfer

Increasing popularity of passive investing

*Source: PriceMetrix Insights, “The Fountain of Growth”, February 2015

WealthBar Positioning

Unified offering: online and dedicated advisor

Robust financial planning

Largest client base is <30 years old

Retirees second largest segment

Leadership has extensive experience in FP at Nicola Wealth Management, associated firm

Nicola has identified 400 “future profile” clients among its 1500 clients

Opportunities for enhanced segmentation between WealthBar and Nicola?

WealthBar has provided a distribution channel for Nicola’s products

WealthBar is rolling out its platform to advisors as a productivity tool

“Invest with Canada’s only full-service online investment advisor”

“We have helped thousands

of Canadians, ages 18 to

88, from across the

country and abroad, plan

their finances and invest

their money.”

Source: https://www.wealthbar.com/

Competitive Profile

Primary

Secondary* MFDA firms and bank branches

Discount

Brokerage

Financial

Planning*

Robo-Advisor Full-Service/

Discretionary

Client

Segments

Active Trader

Mass Market

Mass Market

Mass Affluent

Mass Market

Mass Affluent

Affluent

Mass Affluent

Distribution Online

Call Centre

In-person

Online

Online

Call Centre

In-person

Online

Products &

Services

Stocks

Margin Accounts

Options

MF

Fixed Income

Stand-alone MF

Wraps

Financial planning

ETFs

Pools

Financial planning

Securities

Managed assets

MF

Financial planning

Where do Robos fit in the wealth management landscape?

*Source: Investor Economics, “The Fee-based Report”, Winter 2014

**Source: PriceMetrix, “The State of Retail Wealth Management: 5th Annual Report”, 2015

Discount

Brokerage

Financial

Planning

Robo-Advisor Full-Service/

Discretionary

Pricing

<$10 per equity

trade

2.14% Wraps*

1.93% Stand-alone

MF*

0.90%

Portfolio Fee 1.20%**

Commission trade

0.99%**

Licensing

and

Credentials

IIROC

Investment

Representative

with

Options

MFDA

CFP/PFP

IIROC Registered

Representative

OSC Portfolio

Manager

(CFA/CIM)

CFP/PFP

IIROC

Registered

Representative

OSC Portfolio Manager

(CFA/CIM)

CFP/PFP

Where do Robos fit in the wealth management landscape?

Client Segments

Robos compete directly with the financial planning channel for the primary client segment of

the Mass Market

Mass Market – investable assets <$100,000

Financial planning firms are MFDA firms and bank branches

However, most Robos do not provide FP as a primary offering (WealthBar is an exception)

Some Robos also target the Mass Affluent

Mass Affluent – investable assets $100,000 to $1 million

Full Service firms can use a Robo division to service the Mass Affluent clients who can be

transitioned to a high-touch offering when they reach $500,000 to $1 million threshold

Robos do not compete directly with the discount brokerage channel

Discount is a non-advisory channel that predominantly services the active trader

Discounters’ primary revenue is commissions + net margin interest; most Robo’s are fee-based

Distribution

Robo distribution is predominately online, including mobile

Fully automated solutions; speed of account opening, trading, money movement; alerts

Increasingly sophisticated algorithms create client intimacy; algos fuse individual client

data with aggregate data (personas) to determine client preferences, risk tolerance,

income and wealth patterns

Most offer advisor support via a call centre

Wealthsimple target Millennials; focus is online ease-of-use

WealthBar is focused on Mass Affluent and Affluent; greater integration between online

and advisor service

E.g. Pop-up image of dedicated advisor

Licensing and Credentials

Advisors are OSC-licensed discretionary portfolio managers

Require CFA or CIM designation

Depending on target segment, advisors may have a financial planning

designation

Products and Services

Portfolios constructed mostly with ETFs

3rd party or proprietary ETFs

BMO SmartFolio uses BMO ETFs

WealthBar uses a mix of 3rd party ETFs and pools provided by its affiliate private wealth

management firm, Nicola Wealth

Wealthsimple uses only 3rd party ETFs

Financial planning offered by WealthBar

Includes insurance and corporate tax advice for accounts >$500,000

Products and Services

Do most Robos use ETFs because they embrace the efficient market theory?

EMT: Market prices reflect all known information about a company

3 consequences of EMT:

Stocks are always fairly valued based on public information

Excess returns can only be earned by taking extra risk

No one can consistently outperform the market by picking stocks

Hence, Rule #4 of Wealthsimple’s 5 Rules of Investing:

Don’t pick stocks: The vast majority of professional stock pickers fail to beat the

market. Simply match the market instead. It’s boring and it works.*

*Source: https://www.wealthsimple.com/mission

Products and Services

Those are my

principles, and if you

don't like them... well,

I have others.

Products and Services

EMT does not state that markets are perfectly and always efficient

Persistent pockets of inefficiency exist: Value, small-cap, low volatility stocks outperform on a

risk-adjusted basis

However, strict adherence of EMT argue that investors are unable to consistently benefit from

this outperformance after fees and taxes

Smart-beta (or, factor-based) ETFs are premised on the fact that investors can benefit from

pockets of market inefficiencies

Robos use a mix of capitalization-weighted (purely passive), smart beta ETFs (holdings

screened for single or several factors of outperformance), and some fundamental-based

products in specialty areas (dividends, real estate, alternative investments)

Many proprietary Robo ETFs are smart beta – a key differentiator (BMO, Portfolio IQ)

Products and Services

WealthBar uses both types of ETFs (3rd party), plus pools based on fundamental

investing

Pools are provided by affiliated firm Nicola Wealth Management

Start Your Own Pension Plan

Combining Nicola Wealth's Investment Pools with Canada's leading online financial advisor,

WealthBar now offers Private Investment Pools, making sophisticated wealth management

available to all Canadians.

Source: http://join.wealthbar.com/private-investment-pools/

Products and ServicesWealthBar’s Private Investment Pools

Preferred shares

Mortgages

Bonds

Real Estate

Alternative Strategies

Private Equity

Public Equities

Pricing

Most Robos charge a percentage of AUM

All-in fee = Product + Management + Commissions

Tiered management fee based on asset levels

Lower product pricing for conservative (bond-heavy) portfolios

Higher fees for smart beta ETFs vs. capitalization-weighted ETFs

Weatlhsimple iShares Core MSCI EAFE ETF MER 0.12% (passive)

Wealthsimple Purpose Duration Hedged Real Estate Fund MER 0.80%

WealthBar pools range from 0.99% (Canadian fixed income) to 1.23% (Real Estate)

Nest Wealth charges a flat subscription-type fee + commissions

Robos that target Millennials offer free service for asset levels >$5000

Robos are heavily promoting their lower cost advantage vs. mutual funds

A key competitive advantage as CRM2 regulations that require embedded fee

disclosures come into effect in July

Pricing

Asset Levels WealthBar Asset Levels Wealthsimple

<$5000 Free <$5000 Free

$5000 – $150,000 0.60% $5001 - $249,999 0.50%

$150,001 - $500,000 0.40% $250,000 - $999,999 0.40%

>$500,000 0.35% >$1 million 0.35%

Plus ETF fees ranging from 0.06% to 1.03%

Pooled funds from 0.99% to 1.23%

Plus ETF fees ranging from 0.05% to 0.80%

Nest Wealth

Asset Levels Monthly Fee Plus: $9.99 per trade

(maximum $100/year)

Plus: ETF fee @ average of 0.14%

$0 - $75,000 $20

$75,001 - $150,000 $40

> $150,001 $80

Pricing

Fees Nest Wealth WealthBar WealthsimpleBMO

SmartfolioPortfolio IQ

Mutual Fund

Wrap

Management$240 $30 $200 $280 $280 $0

Trading$100 $0 $0 $0 $0 $0

Product0.14% 0.35% 0.15% 0.28% 0.36% 2.26%

Total %0.99% 0.95% 0.65% 0.98% 1.06% 2.26%

Total $$396 $380 $260 $392 $424 $904.80

All-in annual fee for $40,000 invested in a balanced portfolio*

Source:

https://docs.google.com/spreadsheets/d/14wMiTNkRxlwzaqwUYLgjQSyfGU4hfEbop6cpNCF0tTo/edit?pref=2&pli=1#gid=1947758454

Future Direction

Robos: Where are we headed?

Opportunities

Providing a lower cost investment alternative to the Mass Affluent and Millennials

Capitalizing on wealth transfer to the younger generation

Optimizing investment returns

Low cost, diversification, automatic rebalancing and tax minimization

Returns can be enhanced by 60 bps with tax advice, 130 bps with behavioral coaching and 70 bps

with the efficient drawdown of capital*

Enhancing full-service productivity

Filling the pipeline for the full-service channel

Full-service advisors opened an average of 3.6 relationships for clients under age 45**

*Source: Financial Post, “Robo advisers and ETFs prove its time for a new financial advice fee structure” Jonathan Chevreau, April 19, 2016

**Source: PriceMetrix, “The Fountain of Growth”, February 2015

Robos: Where are we headed?

Challenges

Client acquisition: Investments have traditionally required a direct sales + personalized advice vs.

marketing approach

Push vs. pull

Profitability servicing small accounts requires enormous economies of scale

It’s estimated that WealthFront and Betterment in the U.S. each have $3 to $4 billion AUM

and are far from profitability

Keeping the low cost promise: Need for differentiation and profitability driving Robos toward

costlier smart beta and proprietary products

Can trust be established online? Will clients cut and run in a market downturn?

Does automation obviate the need to make investment choices? Is it really that simple?

Online client questionnaires result in significantly different asset allocation portfolios for the

same investor profile

Different Strokes for the Same Folks

19%

5%15%

10%

12%

23%

16%

30%

31%

36%

30%

41%34%

Schwab Intelligent Portfolios Wealthfront Betterment

Recommended portfolios for an investor with a moderate risk portfolio

U.S. Stocks

International Stocks

U.S Bonds

International Bonds

Other

Source: Adapted from Liz Moyer, “Putting Robo Advisors to the Test”, Wall Street Journal, April 25, 2015

What are the implications for financial planning?

Most Robos have automated the investment process only

WealthBar is one of the few focused on automating financial planning

Can financial planning be fully automated, or is it a personal service?

Automate simple planning tasks, leaving planners to focus on complex cases?

Can automation improve matching of client needs with service offering?

Completely automated solutions

Primarily automated with planner support

Primarily personalized with back-end planner support

Automation may provide seamless integration of planning + implementation

Automation can enhanced transparency through better tracking and data

mining

Are plans being executed and are they successful in achieving client goals?

What are the implications for financial planning education?

Higher skill levels

If less complex planning scenarios can be automated, planners will need to provide value-added

services (e.g. tax efficient retirement drawdown, business succession)

Plan implementation and rebalancing more amenable to automation; discovery is more

personalized. Greater focus on relationship building skills?

Demand for CIM/CFA

Robos are registered as discretionary portfolio manager

Greater differentiation of skill sets (financial planning, sales, service)?

If Robos succeed in promotion through marketing, students who want careers as FP but dislike sales

may have enhanced career options

Better defined career path progression?

Service, planning, sales