Because of broadly rising trends in the stock markets, the past few years have been favourable for passive investment strategies and low-cost, digital investing platforms. Robo advisors have attracted billions of dollars in assets and seen thousands of new accounts.
But many active managers and advisors have dismissed the nascent industry as a non-threat. As Benjamin Felix, an associate portfolio manager at PWL Capital, recently told Global News: “These robo advisors business models are largely untested through a real bear market.”
While he doesn’t know whether the recent bouts of volatility will lead to a recession, Felix said that robo advisors will find themselves in uncharted territory when it happens. At that point, they’ll be tested not so much on their investment performance, but on how well their customers can hold on and stick to their strategies.
This is where human advisors have traditionally provided value. Aside from providing investment recommendations, a good advisor can talk clients out of selling in a downturn when riding it out would be better in the long run. This view is supported by a recent Vanguard paper, which estimated that advisors who help clients “stick to their financial plans when their emotions run high” can increase clients’ yearly returns by as much as 1.5%.
But according to David Nugent, Wealthsimple’s head of investments, said that a bear market would be “our time to shine.” He explained that the robo firm has seen stomach-churning market movements since it started in 2014.
Over that time, the firm has refined a strategy to reassure panicking clients. During every market correction, it sends users an email that usually includes “an explanation of what’s causing the market to go down and why it doesn’t matter.”
The firm also takes note of clients who log onto their accounts more frequently during market dips, as well as those who have experienced larger losses than the average user. Because such clients are more likely to be nervous, they also receive a more personalized message to explain possible declines in their portfolio, as well as why it’s better to stick with their investment plans over the long run.
If these reassurances aren’t enough, Nugent said, clients may also arrange a phone appointment with a human portfolio manager within a week. The firm currently has eight registered portfolio managers in Canada as it services over 100,000 clients with more than $3 billion in assets under management, and it has been ramping up efforts to collaborate with independent financial advisors.
When clients inundate phone lines during a downturn, it becomes a question of how well advisors can field such calls. Nugent noted that under such circumstances, most advisors would be forced to send out a standard email and prioritize speaking to their most important clients.
“We’d run into the same challenges that a traditional advisor would as well,” he said.
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