To win the robo wars, advisors should go beyond the numbers

Robo-advisors are great for easy diversification, but what about when things get tough?

To win the robo wars, advisors should go beyond the numbers
Fans of robo-advisors and advocates of passive investment sing pretty much the same refrain: one can derive more profit from low fees and broadly diversified portfolios than they would from a series of single-stock picks.

But in choosing between digital advice and a human advisor, investors have to take other factors into account.

The main benefit of robo-advisors is their ease of use, according to an article from the Financial Post. Citing Wealthsimple Chief Investment Officer Dave Nugent, the piece said users can load their portfolio with packaged diversified assets, mostly ETFs. They also can avoid the hassles of visiting a broker, as well as protect themselves against the self-defeating urge to flee during market downturns.

“Our models avoid the human tendency to sell and run,” said Nugent, whose company recently announced a rise in assets under management from $400 million to $1 billion over less than two years. “Instead, in a downturn, our models will add what’s cheap.”

Robo platforms make self-directed investment possible, but the investment industry is trying to appropriate such technologies into a model more focused on hand-holding. Some of the largest Canadian banks have either launched their own investment services or have invested in startups to get in on the robo action.

Hand-holding may be exactly what the general public needs. According to critics of robo investing, using pre-packaged financial products peddled on such platforms is not that simple. “I think that unsophisticated clients tend not to realize the subtleties of portfolio construction such as tax liability — when and where asset sales can be recognized, the generational shifts of wealth, foreign currency exposure,” Dan Stronach, head of Toronto’s Stronach Financial Group, told the Post.

“I find that clients want have a person to help make the bigger financial decisions,” said Stronach. “The real value of human interaction with an advisor is in expressing and learning how one’s objectives and emotions relate to the mathematics of money management.”

While robo-advisor platforms are run on algorithms and calculations, investors are ultimately the ones in the driver’s seat. That means certain people are arguably more vulnerable to losses through self-directed investing than they are with an advisor – especially when markets plunge.

“As the stakes rise, our fears go up,” said Chris White, a Boston-based chartered financial analyst and author of Working with the Emotional Investor. “We may fear failure, worry about poverty, humiliation, and loss of power… For those who have not endured market collapses, the counsel of an advisor is valuable.”

The expertise of a flesh-and-blood financial expert comes at a premium. Professional portfolio managers might charge 1% upfront, plus transaction fees and possibly mutual fund fees of up to 2.6%. Robo-advisors, on the other hand, would typically charge advisory fees as low as 0.5% on portfolios of at least $250,000, and as high as 0.7% for those worth at least $2,000 – and some may charge even less.

“At the end of the day, investing is not just about manipulating data,” said Charles Marleau, president and senior portfolio manager at Montreal-based Palos Management. “Robo advisors can handle data efficiently and probably faster than many human advisors. However, there is more than numerical data involved in decision making.”

For more of Wealth Professional's latest industry news, click here.

Related stories:
Advisor group slams OSC priorities
Robo-advisors take aim at high-net-worth investors