Industry expert traces the Canadian robo-advisor space’s growth trajectory over the years – and what could lie ahead
When robo advisors first burst on the scene during the past decade, they sparked heated conversations and posed important questions for the wealth industry. Perhaps the most loaded question: how valuable is a human advisor relationship?
Very valuable, it turns out. According to research by Investor Economics, assets in the robo-advisor channel amounted to $18.6 billion as of September 30, 2022. Full-service brokerages, meanwhile, had $1.6 trillion in assets, while the online discount brokerage channel had $682 billion.
“When robo advisors first came out, it was almost questioning the value of advice … you don’t need an advisor, and you could do everything cheaply,” Vincent Linsley, associate director at ISS Market Intelligence, the parent company of IE, told Wealth Professional. “I think over time, a lot of these firms are realizing there definitely needs to be a human element to this.”
In a report titled “Continued Rise of the Robo-advisor,” Linsley and his co-authors at IE examined the growth of the Canadian robo-advice space by following data on 15 firms.
The industry was certainly strong coming off the starting blocks. Starting in March 2016, when it had just $1.5 billion in assets, the channel experienced exponential growth. IE found that from 2016 to 2021, it saw average yearly growth of 54%.
“That growth has slowed,” Linsley says. “Certainly, we saw more digital investors during the March 2020 downturn, but we didn’t see a huge spike in new accounts and trades within the robo-advice channel like we saw on the online discount channel.”
According to the report, the robo-advice space experienced a 60% growth rate from 2016-2019, with quarterly growth rates of 21% in clients and 12.5% in assets. More recently, quarterly asset growth among robo-advisors has cooled to a more tempered eight to nine per cent.
“On the demographic side, I feel like certainly it [included] more younger [clients], and it still does,” he says. “When we first tracked some segmentation in December 2018, about 58% of clients were under 35, but only 17% of assets were owned by users under 35. Now it’s about 54% of clients under 35, and 20% of assets in that group.”
According to Linsley, young Canadian robo-advisor users don’t have as much assets invested as older ones on a per account basis. But because older investors don’t have as much of a presence on robo-advice channels – at least for now – he says assets are fairly evenly split across all age categories on an aggregate basis.
And while human advisors and robos were once seen as rivals, that relationship is slowly transforming. Over the past few years, Linsley says, there have been increasing numbers of relationships where an advisor can partition off a section of their books to robo platforms, which are then able to manage the assets automatically.
“We're seeing more of what we’d call a hybrid model, which is already more well established in the US and even the UK,” Linsley says.
Continuing developments in AI and other digital technologies, Linsley says, could catalyze a dramatic transformation in the offering of robo advisors. Right now in the U.K., he says there’s growing interest in advice solutions for customers in the lower asset thresholds, which could be delivered through a robo model.
Domestically, he highlighted how Wealthsimple and Questrade are creating integrated pathways for clients to move between their robo advice and discount brokerage channels. But while some banks have taken steps to create a robo-advisory presence – BMO has a business that mixes automated investment in professionally managed accounts with some financial guidance or planning – Linsley believes they have yet to crack the code of customer lifecycle management.
“Most bank clients come into the branch to open a checking or savings account, and they may buy mutual funds later on. As they get more money, they get a dedicated advisor, and as they cross into the high-net-worth space, they’re moved a whole other segment of wealth service,” he says.
“I don't feel like the banks have done a great job yet of understanding how they're going to fit robo into what we call the client progression pathway.”
For the most part, Linsley says the firms IE is watching have stayed status quo as independents, with little to no alignment with the banks to speak of. Meanwhile, banks have yet to come to grips with the robo channel, but they are paying attention.
How and when the two factions come together could be pivotal. Under its most conservative forecasts going up to 2032, IE sees the Canadian robo-advisor space posting CAGR of 12.3% to reach $66.33 million in assets. Its aggressive high-growth forecast, meanwhile, predicts CAGR of 29.1% to $265.79 million.
“Whether the banks decide proactively to integrate the robo channel within multiple paths in their existing channels, or if the robo channel just becomes a dedicated area in and of itself … That’s the big question mark for us,” Linsley says.