Can algorithms replace advisors?

Canadians are most likely to make portfolio decisions based on in-person tips by financial experts, a survey reveals, but major banks are betting that some customers may be better served by algorithm-based virtual advisors.

Canadians are most likely to make portfolio decisions based on in-person tip from financial experts, a survey by an online self-managed platform reveals. But the bigger story may be that big banks are building algorithms to replace advisors.

BMO InvestorLine released the survey as part of a promotional push for adviceDirect, a recently added service that gives users of the self-managed service a “virtual advisor.” Such offerings have developed more of a track record in markets such as the US, where they have proven to be useful in allowing banks to capture more market share while channelling customers into various platforms based on their investible assets.

“The [Canadian] banks have significant resources and capital to be able to systematize the execution and advice that can be provided, based on the scale and size of assets,” said Thane Stenner, director, wealth management, and portfolio manager with Stenner Investment Partners within Richardson GMP. “For the do-it-yourself investor there’s no doubt that investorLine and other resources that are available to the mass market provide a very good service for very reasonable fees.”

Launched in September 2012, adviceDirect provides specific buy and sell recommendations based on an investor profile that are tailored for a client’s goals, time frame and risk tolerance. It monitors the client’s portfolio and sends notifications with specific recommendations when their portfolio needs attention on areas like diversification, asset allocation, risk and equity ratings.

Such virtual advisors have been of benefit for large institutions in other markets, enabling them to have their “live” advisors focus on high-revenue affluent clients, while allowing institutions to push lower-tiered clients into online channels.

Merrill Lynch, for instance, provides advisors for clients with at least $250,000 in investable assets, while those with less can access their Merrill’s online Edge platform and a 1-800 number. Thus, the bank is able to dedicate human capital to high-yielding clients and service lower-end ones through a platform that requires lower-overhead.

BMO says that the platform is designed for investors who want to self-manage their accounts but still want to have access to advice.

“There’s a growing number of investors out there who, while still wanting to have the final say with their investing decisions, want a co-pilot to help them manage their portfolios,” said Viki Lazaris president and chief executive of BMO InvestorLine said. “To help this group, BMO InvestorLine recently introduced adviceDirect, a first-of-its-kind service.”

Among the survey’s findings, 65% of Canadian investors would act on that getting a solid personal recommendation from a financial expert would cause them to buy or sell. The second major motivator was changes in interest rates (63%), followed by fluctuations in major stock indexes (50%) and corporate news such as earnings and product launches (48%).

Stenner, who manages high-net-worth accounts, noted that the most successful investors tend to be the ones who can filter out both noise and personal recommendations.

“In many respects investors look for a lot of confidence before they invest when many times it should be the opposite of what they should be doing,” Stenner said. “I’ve been an investor for 38 years myself and I run a multi-family office where I work for people who have from $10 million to invest, and I can tell you the reason why wealth investors become wealthy is because they have a higher batting average because they sift information differently than the masses.”

BMO’s Lazaris also noted that investors should develop filters when evaluating the information they receive.

“The investing environment is becoming increasingly complicated, especially when you consider how interconnected the world’s financial markets are and the expanding number of investing options available to Canadians,” she said. “Therefore the premium Canadian investors place on receiving recommendations makes sense. However it’s important to not rely solely on tips when making investment decisions. Investors should also seek sound advice.”

Also among the top motivators were and allegations of corruption within a company (44%), political or social unrest (44%), natural disasters (43%) and currency fluctuations (42%).

The study also found that, despite the increase in financial news being provided by 24/7 business networks, online publications and social media sources, Canadians have not raised their trading frequency as a result.  Only 14% of investors reported that they trade more because of the increase in news they receive while 71% state that it has had no impact on their trading frequency or style.

The online survey fielded by Pollara between July 26-30, with a sample of 1,020 Canadians who were 18 and older. The bank said the results would be accurate to +/- 3.1%, 19 times out of 20.

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