Robo-advisors

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Norbert Schlenker
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Robo-advisors

Post by Norbert Schlenker »

Cinthia Murphy @ etf.com wrote:The so-called robo-advisory business is quickly growing, and it’s easy to understand the appeal of automated portfolio construction and management for a very low cost. This type of log-in, answer-a-survey, get-your-portfolio-underway type of experience has attracted millions of dollars from investors of all sizes. But there are risks that need to be understood.

Firms like Wealthfront and Betterment are some of the biggest names in a space that’s populated by at least a dozen firms. The segment came into the spotlight this week after reports surfaced that Vanguard—the largest mutual fund provider in the world and the third-largest ETF provider in the U.S.—is joining the robo-advisory industry.

A Vanguard representative told ETF.com the firm is still working out the details of its program, which is called “Personal Advisor Services,” ...
I'm thinking of trademarking "Impersonal Advisor Services." :lol:
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Shakespeare
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Re: Robo-advisors

Post by Shakespeare »

Is a robo-advisor that much different from a low-cost balanced fund for most individuals who don't know what they are doing?

ISTM that one of the simple couch potato portfolios is best for the majority of people. Extra slicing and dicing is only needed for either sophisticated investors or those having to balance a portfolio over several different accounts (RRSP, non-reg, TFSA, corporate, etc.)
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Re: Robo-advisors

Post by brucecohen »

Is a robo-advisor that much different from a human advisor who has more than 100 or so clients in a handful, or less, of standardized portfolios?
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Re: Robo-advisors

Post by Shakespeare »

What are the Tangerine Investment Funds (previously ING Funds) other than robot funds?

Of course, I've always felt the 1.07% MER was too high.
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Shakespeare
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Re: Robo-advisors

Post by Shakespeare »

I really can't see the approach working well in Canada. They would have to be sold. Who's going to do the pushing?
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Re: Robo-advisors

Post by IdOp »

Shakespeare wrote:Who's going to do the pushing?
Maybe a new line of work for robo-calls? ;)
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Re: Robo-advisors

Post by DanH »

Isn't BMO's Advice Direct initiative the closest thing we have in Canada? The fees appear excessive on the surface. I worked for a company that older posters might remember and what we were doing as far back as 1997 was very much along the lines of the robo-advisors, albeit a cruder simpler version. But we actually spent a fair amount of time (mine and that of a few programmers) in an attempt to build a system that could take many client specific inputs - e.g., tax rates, accrued gains, age of redemption schedule, etc. - and using our ratings of the different funds produce a new portfolio that include a set of buy/sell recommendations.

At the time - 1998/99 - that proved to be too complex to automate well enough to make the output meaningful and valuable. I don't know how BMO is doing with its offering - I'm doubtful - but I think the market for robo-advisors could really open up. The trigger would be driven by regulators. If we get into a situation where a best interest standard is imposed (hmmm, probably won't happen) or commissions are banned (more likely in the next five years) I would guess that more computer driven models could carve out a larger piece of our market. But they'll have to be more competitively priced than BMO's. As it is I see that BMO is offering a 25% discount on fees as a promotion and that's closer to what is likely a more palatable fee for what they appear to be offering.
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Re: Robo-advisors

Post by ockham »

The last financial advisor I ever used was in effect a robo-advisor, albeit a human one. As he explained to me, Nesbitt Burns' trading desk was advising that it was time to sell Dofasco, so he was working through the list of his clients who held Dofasco and giving each of them the advice that it was time to sell Dofasco. That would have been 10-15 yrs ago.

Just pre-recording a message makes a lot more sense. :beer:
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Re: Robo-advisors

Post by Sugerman »

An interesting piece in a recent issue of AAII Journal:

http://www.aaii.com/journal/article/the ... ion-making

In effect, the author is suggesting that rules-based decision making will have the edge over even expert human advisors.
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Re: Robo-advisors

Post by twa2w »

Jim O'Shaughnessy has a good piece on models in his book - what works on wall street.
It is in the one of the first few chapters. I found it quite fascinating at the time and adapted much of it to my own investing.

In fat model investing is the whole premise of the book and his mutual funds..

Also our own NormR does some modelling with his top 200 articles and his \graham stocks etc on Stingy investor - with what appear to be good results.

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Re: Robo-advisors

Post by Springbok »

ockham wrote:The last financial advisor I ever used was in effect a robo-advisor, albeit a human one. As he explained to me, Nesbitt Burns' trading desk was advising that it was time to sell Dofasco, so he was working through the list of his clients who held Dofasco and giving each of them the advice that it was time to sell Dofasco. That would have been 10-15 yrs ago.
I was at one time with Scotia McLeod. It seemed to me that the local advisor received recommendations from head office and those were massaged locally to suit particular clients situation. So, a sort of hybrid-advisor. I imagine most large brokerage houses work that way. Not that bad really, except for the exorbitant fees charged. Of course the client didn't have to act on the advice. I recall being advised to buy Nortel after it had dropped from $120 to $60 :(
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Re: Robo-advisors

Post by Bylo Selhi »

From another thread:
Bylo Selhi wrote:Even the newspaper industry is getting into it: Nest Wealth "is Canada’s first subscription-based investing service. For one fair, flat monthly price we provide you with a personalized portfolio, a dedicated portfolio manager and complete transparency so you can keep more of what you earn throughout your life..."

[Metroland Media Group Ltd. today announced a $1.5 million cash investment in Nest Wealth Asset Management Inc. (“Nest Wealth”), a Canadian online automated financial advisor. (Metroland is in turn owned by TorStar.)]
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Re: Robo-advisors

Post by Bylo Selhi »

Is TDAM next? TD Asset Management moves with banking industry’s ‘seismic shift’
Tim Wiggan, chief executive officer of TD Asset Management, pointed out in a recent interview that a bank wouldn’t necessarily need a slate of ETFs to create a robo-adviser – but it helps.

He said that robo-advisers have three levels: advice based on a customer’s risk tolerance, a platform that automatically rebalances investments, and what Mr. Wiggan calls “the underlying ingredients” or ETFs.

“You can be the adviser and the platform without owning your own ETFs,” he said. “But I think if we were to launch a robo-adviser in the future it would make sense – given our competitive position today – that we have as many of those three levels as possible.”

The new ETFs, he added, give TD “quite a bit of optionality at a time where there is a lot of change. There is always change in our business, but I refer to today’s change as a seismic shift.”
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Re: Robo-advisors

Post by AltaRed »

I believe this is why RBC is getting into the game. BMO IL has done a lot of advertising with their various robo-services AND they are offering cash for investors to bring in money to them. Last week, I got an invite to bring in $3 million for $4000 cash, or $2 million for $2500 cash or $1500 cash for $500k of new money. More effective and of value to BMO IL than the old '1000 free trades' bullshit'.

They are ahead of the others in this respect and if I was them, I would be upping the ante even more. Especially since it appears their BMO ETF family has more than enough critical mass.
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Re: Robo-advisors

Post by DanH »

I read this Tom Bradley blog post the other day: Steadyhand and Robo - Compare and Contrast. And I noticed a comment under that post from another robo advisor. So I looked her up and visited the firm's site. It really struck me that each robo advisor site in Canada looks, feels and 'sounds' the same. Many even use the same chart - e.g., same $x in fees over N years. On the surface at least, there is very little apparent differentiation between them.

Any of the big banks can deliver a real blow to the competition by following the Schwab model - but maybe it's too early. Maybe they need the other smaller players to build up a big business in this segment first. The sustainable size of this segment will be clearer then; which might make it more feasible to start competing on price - knowing there is enough volume to make it worthwhile. Or maybe our less competitive industry won't go into a price war - leaving more subtle differentiation.
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Re: Robo-advisors

Post by AltaRed »

Dan, I assume you are talking about the Schwab Intelligent Portfolio program? I suspect the field would have to get very competitive to go that far here....but maybe.

FWIW, not to single out BMO, but I will will for this thought... I think the BMO AdviceDirect is expensive for 'smaller accounts' but for someone who has $1+ million or so and is too disinterested or too busy to do the BMO IL DIY route, $3750/yr (above and beyond ETF MERs) is really cost effective at 37.5 bp (half that for $2 million). There could even be a credit if BMO ETFs are used.

I believe they are making a mistake IMO with their 0.75% tier though. I'd set it lower to capture the client base and build on that and really kill the competition.
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Re: Robo-advisors

Post by DanH »

Yes I am talking about that Schwab service and yes it's too early in the robo evolution for razor thin fees to surface. And we may never get there because of the regulatory and scale differences between the U.S. and Canada. But another interesting example in the U.S. pointed out to me by a friend is SoFi. It established an online lending business and recently extended their business into wealth management - i.e. robo advisor.

They charge $5 a month* for the usual services. The catch - which they're candid about - is that the agreement you sign with SoFi gives them permission to lend your ETF holding to hedge funds' shorting activities. And that's where they get most of their revenue - which is an interesting model I'll have to think more about. It makes me wonder if this model allows a firm to work around the Canadian requirement to register as a Portfolio Manager (which I don't think is required in the U.S...the equivalent of which is the RIA registration). But my guess is 'no' since the OSC has tried to get in front of this issue before this segment gets too big.

========================================

*When you look at their FAQ it looks as though they may have started at $2 monthly but even at $5/month, it's dirt cheap.
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Re: Robo-advisors

Post by DanH »

Provisus subsidiary to introduce unique online platform

Provisus is a provider of separate account platforms to smaller investment dealers. That means they act as the investment consultant - i.e. picking managers; designing portfolio models - and they find a custodian to execute trades and custody assets. They then take this 'platform' or 'program' to smaller dealers and say here is a fee based program your advisors can use to compete with banks.

From the article...
Transcend Private Client Corp., a subsidiary of Toronto-based portfolio management firm Provisus Wealth Management Ltd., is bringing flexible financial planning and "pay for performance" investing services to individual investors with the launch of its Transcend Direct online platform.

"A performance-based fee structure provides an incentive to maximize risk-adjusted returns and accountability from money managers. It is one of the most cost-effective fee structures in the country and something that has long been needed in Canada," says Chris Ambridge, CEO of Transcend Private Client Corp. and president and chief investment officer of Provisus Wealth Management.
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Re: Robo-advisors

Post by OnlyMyOpinion »

I admit that I know nothing about these robo-advisors. I'm wondering though if the investing knowledge/goals sort of questions a person might fill out with these could get people into trouble?
I seem to recall my parent's indicated a preference for something like 'modest growth with preservation of capital' when they sat with their bank advisor. Seems a fairly nebulous constraint. Their advisor though knew more about them personally, what their level of comfort and personal situation was, so did not push them too far into high MER equity MF''s. I'm not sure if this would be the case with a robo-advisor.
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Re: Robo-advisors

Post by OnlyMyOpinion »

Posted today:The Value Of Sound Financial Decisions (Wade Pfau) http://www.forbes.com/sites/wadepfau/20 ... 8fbf536579
Vanguard developed their Advisor Alpha concept in 2001... their overall estimate for Advisor Alpha as 3% on a net basis (4% less an assumed 1% advisory fee)... their objective is to shift the focus away from “traditional beat-the-market objectives” toward what they view as the “best practices of wealth management.” These best practices... focus on tax efficiency, costs, risk management, and making good investment decisions (behavioral coaching). The value added by good advice can greatly exceed the fees... It is incorrect to view advisory fees as a zero-sum game the advisor wins at the expense of the client; both can be winners.
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Re: Robo-advisors

Post by Flaccidsteele »

OnlyMyOpinion wrote:... their objective is to shift the focus away from “traditional beat-the-market objectives” toward what they view as the “best practices of wealth management.”
How was the set objective "traditional beat-the-market" in the first place? Weren't they charging a fee based on % AUM?

Isn't a "beat-the-market" risk-prone mindset only supposed to happen if advisors are incentivized on performance?

(And if most advisors charge a fee based on % AUM why would a "beat-the-market" objective be "traditional"? It should be "untraditional" shouldn't it?)
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Re: Robo-advisors

Post by DanH »

A interesting and insightful article by Michael Kitces on what he says is significantly slowing growth of robos directly serving retail investors.
...it’s notable that relative to their growing asset base, drawing in “just” $100M per month actually represents a drastic decline in the growth rates of the companies. After all, in theory growing to twice the AUM and twice the number of clientele should lead to twice the asset growth for the company thanks to twice as many clients who can refer, allowing it to maintain a consistent growth rate.

Instead, relatively flat net flows supporting an ever-growing asset denominator is causing robo-advisor growth rates to crash, with both Wealthfront and Betterment growth rates falling to just 1/3rd of their levels from a year ago.
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Re: Robo-advisors

Post by kcowan »

I would wait until full fee disclosure shows up in August statements and then anticipate increased activity in Sept-Dec.
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Re: Robo-advisors

Post by DanH »

Keith, if you're referring to the so-called CRM2 disclosure rules that kick in in mid-July, the reality is that most people won't see these cost and performance reports until 2017.
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Re: Robo-advisors

Post by kcowan »

DanH wrote:Keith, if you're referring to the so-called CRM2 disclosure rules that kick in in mid-July, the reality is that most people won't see these cost and performance reports until 2017.
Yes I am. So can we demand a sneak peak in August?
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