BUSINESS

Canada's Banks Losing Customers To 'Robo-Advisers,' And Banks Want A Piece Of The Action

04/01/2015 03:03 EDT | Updated 06/01/2015 05:59 EDT
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TORONTO - Canada's financial services industry is set for a shakeup, and some of the country's biggest banks are taking note.

Fed up with pricey mutual funds, a growing number of Canadian investors are turning to robo-advisers, low-cost online investment managers. Tech-savvy millennials with a tendency to distrust traditional wealth advisers are particularly keen.

"We're attracting a lot of young professionals away from the banks," said David Nugent, portfolio manager and chief compliance officer at WealthSimple.

The firm, which launched in September, has been growing its client base by double digits and adding a couple million dollars to its assets under management each week, according to Nugent.

As Canada's securities regulators continue phasing in new rules that require investment advisers to disclose how much they're collecting in fees, investors are expected to start seeking out low-cost alternatives.

Robo-advisers typically use a questionnaire to determine an investor's level of risk tolerance, then invest the client's assets into a passive exchange-traded fund (ETF) portfolio that is regularly rebalanced using algorithms.

By removing the need for office space, in-person meetings and a costly staff of fund managers, robo-advisers are able to provide low-fee services, even to clients with relatively meagre assets. While many larger institutions charge as much as 2.5 per cent, robo-advisers charge as little as 0.3 per cent, depending on the size of the client's account.

"I think this business is creating a lot of interest among the banks, for the simple fact that we can have a profitable client at a much lower asset level," Nugent said.

The model is not without its drawbacks. There are concerns about whether a questionnaire can be sophisticated enough to appropriately determine an investor's appetite for risk. The companies are new and relatively untested, and they can't replace the personalized advice that high net worth clients receive from human advisers.

But in the past, Canadians who didn't who didn't have enough assets to warrant hiring a full-service investment adviser had few choices beyond mutual funds. Robo-advisers seek to provide a cost-effective alternative — and unless they come out with similar platforms, the country's biggest banks risk losing customers.

Last fall National Bank launched InvestCube, an online service that provides investors with five different ETF portfolios designed for various levels of risk tolerance.

Others, including the Bank of Montreal, Scotiabank and TD Bank, have said they are taking a wait-and-see approach.

"We will watch all of these new players and new models that are emerging and if it makes sense for our clients we will seriously look at it," chief executive Bharat Masrani said following TD Bank's annual meeting last month.

Some investment advisers and financial planners have suggested the banks might not be keen to launch online investment managers, as doing so may eat away at their mutual fund businesses. But Barker-Merz said it's important for financial institutions to adapt to changes in the industry.

"As things evolve some businesses get cannibalized and that's okay," she said.

Dan Bortolotti, a Toronto-based investment adviser and the blogger behind Canadian Couch Potato, says some robo-advisers seem to be positioning themselves to get bought out by larger financial institutions.

However, he noted, many of them were founded by entrepreneurs with an anti-industry stance as a way of addressing what they view to be an "unfair, almost predatory model."

"If you are with one of the do-nothing advisers, who don't really do anything except throw you in some random mutual funds and never talk to you, well then you are definitely a candidate for looking at switching to a robo-adviser," he said.

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