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Robo-advisers offer investment advice through websites and mobile applications. In the U.S., this segment – which was born after the financial crisis – manages tens of billions of dollars for clients. American robo-advisers can provide investment advice with minimal personal contact. And while they are registered investment advisers, they have the ability to opt-out of their fiduciary obligations according, to an updated SEC policy document.
Regulatory filings for Betterment LLC, the largest U.S. robo-adviser, show that it manages $5-billion in assets on behalf of 130,000 clients. That's an average of about $38,000 per client. It employs 136 people, of which only eight are registered to give investment advice and another seven are licensed salespeople. So Betterment's 15 licensed employees serve nearly 9,000 clients each. The typical client, then, has little or no contact with a licensed investment adviser or salesperson. This is what's known as scalability – i.e. the ability to add clients without adding employees and systems.
Robo-advisers in Canada
In Canada, robo-advisers must register as portfolio managers, which cannot opt-out of their legal fiduciary duty. In my column for the September 2016 issue of Investment Executive, I explain why this will limit the scalability of Canadian robo-advisers' businesses. If they grow as planned, they will need tens of thousands of clients to succeed financially. Technology infrastructure can be built to easily handle this volume. But obligations of registered portfolio managers will also require a significant hiring of people who can speak with clients about their investments, and that limits scalability by adding to costs.
Wealthsimple is the only Canadian robo-adviser that has released business milestones. The October 2016 issue of Report On Business magazine notes that Wealthsimple, which calls itself Canada's largest robo-adviser, has 20,000 clients investing an average of $25,000 each. It employs five registered individuals. I'm not privy to Wealthsimple's plans, but they could need dozens to be able to spend the time needed to have a "meaningful discussion" with each client to gather sufficient information in order to make sure recommendations are suitable. This is the minimum regulatory requirement for all registered portfolio managers – robo or otherwise.
One could argue that investor-clients needn't care about the business side of robo-advisers so long as they deliver good advice and service. But if a business is, at best, experiencing growing pains or, at worst, struggling to make a profit, it can affect both the quality of advice and service.
Robo-advisers are a great innovation, so I hope that they can all find a workable solution to adhere to the rules while still making it worthwhile to serve clients of all sizes (particularly those with less than $250,000). Investors will need robo-advisers to find this balance to fill the gap that will be created by new regulations and competitive forces.
Dan Hallett, CFA, CFP is a principal with Oakville-Ont.-based HighView Financial Group, which acts as an outsourced chief investment officer for wealthy families and foundations. He also contributes to The Wealth Steward blog.