Lack of human touch may not be for everyone

Wealthsimple, a leading robo manager, recently announced that it has $1 billion in assets under management, up from $400 million less than two years ago, according to Dave Nugent, chief investment officer at the Toronto-based company.

The advantage of robos is academic proof that the performance of a diversified portfolio of different asset classes like stocks and bonds and different sector allocations such as Canadian, U.S. and emerging markets will beat a series of single company picks. Added to that are the very low fees robos charge.

“Our concept is for people who don’t want to do asset selection themselves and want more time to live their lives,” Nugent says.

Robos are for ease of use, no schlepping downtown to see a broker and pay for parking, and removing behavioural biases such as the urge to purge in market downturns, Nugent explains. “We take advantage bespoke investment advice, not the off the rack plans of robos, he adds.

“I find that clients want have a person to help make the bigger financial decisions. A robo is a stripped down version of what an advisor offers,” Stronach says. “The robo’s cost is very low, but the investor gets what he or she pays for. 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.”

The interplay of emotions with what is supposed to be a rational calculation of risk and return often goes awry, especially when markets plummet, says Chris White, a Boston-based holder of the Chartered Financial Analyst designation who is the author of Working with the Emotional Investor (Prager, 2016). “As the stakes rise, our fears go up,” he explains. “We may fear failure, worry about poverty, humiliation, and loss of power. Novice investors are especially likely to need hand-holding. For those who have not endured market collapses, the counsel of an advisor is valuable.”

Robo advice is nevertheless an idea that had to come. Nobel Prizes have gone to economists who have proved that allocating money to different kinds of assets such as stocks, bonds and real estate will beat single asset class investing. The academic idea of having a full house of assets morphed into the idea of robo advising, aided by the very low fees robo advisers charge. In contrast to the usual professional portfolio manager, who may charge 1 per cent up front plus transactions fees and perhaps a layer of mutual funds fees up to the average level of 2.6 per cent for stock mutual funds, robo advisers may just offer very low fee exchange traded funds and a very low robo charge.

Typically, the robos have an all-in advisory fee of 0.50 per cent on a portfolio of $250,000 to $500,000; 0.6 per cent down to $100,000; and 0.7 per cent for $100,000 down to as little as $2,000. Some firms have lower fees: for example, Wealthsimple will do its work for 0.5 per cent below $100,000 and 0.4 per cent above $100,000 plus any fees charged by ETF or other securities. These are massive savings and can boost client returns massively over periods of decades. With a $100,000 initial investment and no additions, the 2 per cent cut considered as a return would add $48,595 over a 20 year period

“At the end of the day, investing is not just about manipulating data, says Charles Marleau, president and senior portfolio manager at Palos Management Inc., a Montreal-based money manager “Robo advisers can handle data efficiently and probably faster than many human advisers, however, there is more than numerical data involved in decision making,” he says. “Would you take a computer statement that you have a serious physical problem at clinic and walk out? Would you not want a doctor to explain the diagnosis and prognosis? Robos screen for opportunities without taking the pulse of the client.”

The future of the industry may ride on just how much that human touch is worth.