Why you may need a robo-advisor

If you have clients who’d like to self-manage a portion of their investments, you might not know how best to serve them. If that’s the case, an in-house robo-advisor may be your best friend when it comes to capturing the DIY investor.

Craig Senyk, director of portfolio management at Mawer Investment Management in Calgary, says there are two types of DIY investors: the young professional, or “yo-pro,” and the entrepreneur.

“Entrepreneurial types truly want to pick their own investments,” he says, “but yo-pros want their portfolios managed for them. However, yo-pros may not have enough assets to meet the minimums, and they don’t like the fees associated with the traditional fee-for-service model.”

Enter the robo-advisor (though Senyk prefers the term “online discretionary service”).

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He says offering access to this technology in-house could retain a clientele that is currently underserved by the investment industry.

“Because of the amount of money yo-pros have to invest,” says Senyk, “they are usually put into non-discretionary investment models, where they have to ultimately choose their own investments (with advice). Largely, those models do not take a total portfolio approach. Investments get recommended without looking at the risk at the overall portfolio level, and many of those investments will have high fees.”

Typically, robo-advisors ask investors a few multiple-choice questions to assess their time horizon, investment objective and risk tolerance before creating personalized ETF portfolios. There is contact information for a real advisor if clients have questions.

Reg Jackson, a VP and portfolio manager at National Bank Financial in London, Ont., says he’d love to be that real advisor popping up as an icon ready to connect with yo-pros. Jason Stalker, president of Stalker Financial Group in Winnipeg, says if an in-house robo-advisor were available, he’d offer the service to clients who already have DIY investments. Ideally, the robo-advisor would help ensure a consistent approach to a client’s overall portfolio. “[Different] portfolios could be fighting each other without even knowing it,” he says.

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Enhanced value proposition

Although Jackson would embrace an in-house robo-advisor, he says there’s ultimately nothing new about what robo-advisors do when it comes to portfolio creation. “There is no value added; it’s just a different way to [invest].” He challenges advisors to offer investors an enhanced value proposition that includes products and services that go beyond the robo-advisor experience.

The robo-advisor may fail some clients, Jackson says, who have trouble answering the multiple-choice questions accurately because they don’t understand either the questions or their own needs.

As an example of a value-added service, Stalker says his firm adopted MER calculators earlier this year so clients better understand their fees and net returns.

Still, a robo-advisor may provide a starting point for value-added services that an advisor can take further — especially with the entrepreneurial DIYer.

Although entrepreneurial investors probably wouldn’t be interested in the investment choices being made for them by a robo-advisor, says Senyk, the associated tools, like risk profilers and cash flow projections, would be welcome additions to their investment tool kits.

And as DIYers gain knowledge and experience with robo-advisors and other tools, openings for dialogue abound.

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Talking to DIY clients

Stalker recalls such a case with one of his DIY clients, who can be described as both an entrepreneurial and a yo-pro investor. “As he did better on the DIY side, he also took bigger risks that undermined him, so there were times when he came out with substantial losses.” The client’s style contrasted sharply with Stalker’s, and Stalker highlighted those two styles over the years as both he and the client invested in various market conditions.

When the two met every six months, they engaged in lighthearted banter about whose investments were doing better. But the client was serious when he asked Stalker about the hows and whys of his management style. Stalker told him his firm wasn’t “trying to knock it out of the park with every holding,” but was slowly building wealth. The client realized that although he might do better in the short term, Stalker’s method was better in the long term. Today, the client has fewer DIY investments and a greater percentage of his assets with Stalker.

In addition to being conversation starters, robo-advisors complement the communication style of the typical yo-pro. Senyk notes yo-pros tend to prefer video chat, then instant message or email and, in last place, the phone call. Scheduling a face-to-face meeting? If it means two hours or more to drive downtown, find and pay for parking, have the meeting and drive back out of the city, forget it. It’s time they’re not willing to lose, says Senyk.

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Sensitive to suitability

While robo-advisors are convenient, they aren’t for everyone; suitability is a prime concern. There’s at least one client to whom Stalker would be unwilling to offer the service because the client’s DIY track record is unsound.

For Jackson, regardless of the models and communication methods used, advisors should remain attentive, because “what [investors] say and what [they] mean are often two completely different things.” And no model — robo-advisors included — provides protection from a longer-term down market. That’s when advisors “really need to help [clients] distinguish between a good investment plan and making poor emotional decisions.”

Serving DIY clients

• Offer an in-house robo-advisor or other educational tools
• Identify and provide value-added services
• Capitalize on increased opportunities for dialogue that value-added services provide
• Communicate via clients’ desired mediums