Robo advisors face their biggest test yet

Wealthsimple and WealthBar CIOs explain how they’re coping with their first major market downturn

Robo advisors face their biggest test yet

Robo advisors are facing their first real bear market test in this coronavirus-driven sell-off. Their leaders, though, insist they’re built ready for the challenge.

Chief investment officers from Wealthsimple and WealthBar told WP how they’ve planned for downturns in their models with mechanisms in clients’ portfolios to cushion the losses every investor is feeling right now. They noted that as technology companies, they’re well positioned to take their infrastructure remote and communicate with clients from a distance through this ongoing public health crisis.

“I’m confident we’re up to this test,” WealthBar CIO Neville Joanes said. “As a robo advisor with a focus on technology, our workforces are able to work remotely and our business continuity plan is robust. It ensures that we are there to safeguard our clients’ investments and we’re there to help them understand what is happening and provide them with advice and direction as they need it.”

WealthBar’s portfolios are taking hits. Joanes explained that their balanced ETF portfolio was down 14 per cent as of last Friday, compared to a 23 per cent drop in the TSX composite. WealthBar’s private investment portfolios, which uses a partnership with Nicola Wealth to invest in areas like private equity and real estate, were only down around seven per cent.

Wealthsimple is seeing similar hits, but an eye on diversification has cushioned their portfolios as well. Their conservative portfolios are down around five per cent, while growth portfolios are around 14 per cent.

“That’s, by and large, what you can expect at a difficult time like this,” said Wealthsimple CIO Ben Reeves. “We put our clients into portfolios with the possibility in mind that this could happen. Our clients should still achieve the outcomes they’re looking for over the timeframes that are relevant to them.”

Reeves explained that his cushions have largely come from an allocation in longer-duration government bonds, one of the only asset classes up this year. As well, his portfolios carry a basket of minimum volatility equities to keep the equity side from going into free-fall which, in turn, helps reassure nervous investors.

Reeves is maintaining a ‘keep calm and carry on’ line, echoing Wealthsimple CEO Michael Katchen who posted a similar message on twitter Tuesday. He noted that it’s historically been difficult for active managers to trade out of downturns like this and they’re far more likely to lose out in big bets. He believes that as frightening as things look now, markets have historically rebounded from down cycles like this.

Joanes isn’t changing his long-term strategic outlook, but as rates have come down he’s switched some of his short-term US bond exposure to mid-term. That will also be reflected on the Canadian side. He’s looking at potential redistribution of geographic exposure in equities but while the market remains so volatile his team at WealthBar is not planning to make any changes.

Wealthsimple, and WealthBar, both benefit from a client base that skews younger and is largely in the ‘accumulation’ stage of their portfolios. Both CIOs agree that clients with a 25- or 30-year time horizon shouldn’t be overly worried about their portfolios.

Reeves thinks even Wealthsimple’s older clients are still in a good position. They would have largely been put into conservative portfolios which are only down around five per cent. More than withdrawals, Reeves and Joanes are seeing a slew of questions from clients. They’re leveraging technology to answer them.

“I think one of the advantages of a robo advisor is that we can engage with our clients where they are, on their phones, on their computers, on their laptops,” Joanes said. “We can educate them and provide them with information that we have. We use traditional channels like phone and email, but we can scale them. We use digital channels like social media and a blog. From a capacity standpoint in handling our clients’ needs, we’ve got the capacity to go above and beyond.”

Wealthsimple, too, is using their tech and communications savvy to reassure clients. Their financial advice team is in regular contact with clients over the phone while the firm sends out mas communications explaining the downturn and how they’re handling things as a company. Katchen has emailed Wealthsimple’s investors giving a big picture and Reeves is holding webinars so clients can ask him directly about market history and portfolio construction.

“Our clients behaviour has been fantastic,” Reeves said. “They're really doing what they need to do in sticking to the plan. We've worked really hard to set expectations up front and it seems like that those messages have been resonating.”