Personal Finance

Service quality and risk assessments vary widely, according to DALBAR.
By Rudy Luukko | 16/09/16

Online investment advisors -- commonly known as robo-advisors -- have won praise for offering convenient solutions at lower costs than traditional financial-services providers. But their breakthrough in the Canadian retail market has not been without glitches and growing pains, according to a newly completed study by market researcher DALBAR Inc.

About the Author
Rudy Luukko is editor, investment and personal finance, at Morningstar Canada. Before joining Morningstar in 2004, he worked as an editor and writer for various general, specialty and institutional media. He holds a Canadian Investment Manager (CIM) designation and a Bachelor of Journalism degree from Carleton University. A former chair and founding member of the Canadian Investment Funds Standards Committee (CIFSC), he has also co-authored courses for the Canadian Securities Institute. He welcomes your comments at but cannot provide individual advice. Follow Rudy on Twitter: @RudyLuukko

In documenting the onboarding experiences of prospective clients, the consulting firm observes that service quality varies widely. It concludes that robo-advisors can differentiate themselves through efficient service and effective risk assessment, which investors should not take for granted.

DALBAR hired 30 mystery shoppers, all of whom had expressed an interest in robo-advice, to test the account-opening services of 10 Canadian robo-advisors. To provide cross-border comparisons, 15 U.S. mystery shoppers tested five of the biggest American robo-advisors. The mystery shoppers in both countries carried out their research between April and June of this year.

One of the study's key service-related findings is that online communications with robo-advisors, such as chat lines, are not necessarily quick and convenient. "Live chat is a popular onboarding tool that can expedite client acquisition," the study says. "However, it creates an expectation of 'instant connection' which many robo-advisors were unable to meet."

DALBAR, which is based in Boston and also has an office in the Toronto area, concludes that the biggest service challenge facing Canadian robo-advisors is quickly placing funds in a new account. Half of the robo-advisors that the mystery shoppers contacted took longer than four business days to get money into an account. By comparison, the five U.S. robo-advisors tested -- including leading providers such as Betterment, Charles Schwab and Vanguard -- were able to fund accounts in one to three business days.

The ease of account opening is, of course, only one consideration for robo-advisor clients, nor should it be the most important one. But within its relatively small group of mystery shoppers, whose ages ranged from under 30 to more than 60, some differences in preferences emerged between generations and income levels.

Mystery shoppers with lower and middle incomes, who also tended to be younger, were more driven by curiosity and convenience when choosing a robo-advisor. The study said certain firms, such as Wealthsimple, attracted more curious clients than others. (Wealthsimple, which has focused its marketing efforts primarily on millennials, has been running ads in various online, broadcast and print media emphasizing how simple, easy and fun it can be to become an online investor.)

For higher-income earners -- defined in the DALBAR study as those earning more than $100,000 a year -- savings on fees were overwhelmingly the most important consideration in choosing a robo-advisor. This makes sense, since the potential savings on fees for a $500,000 account would be far greater in dollar terms than the savings on a $5,000 one.

Yet fee disclosure was more likely to be provided at the end of the account-opening process rather than at the beginning. In this respect, robo-advisors didn't appear to be all that different from traditional advice-givers.

On the whole, considerations such as reputation, convenience and the investment platform were more important than price for DALBAR's group of mystery shoppers.

For example, the shoppers found BMO SmartFolio to be attractive mostly because of its bank affiliation, while Questrade Portfolio IQ's most noted attribute was its "perceived convenience," according to DALBAR. However, SmartFolio and ModernAdvisor were the two firms that completed account applications upon initial contact, the study says.

Though robo-advisor clients are cost-conscious, they still expect value in return for what they're paying for, according to Anita Lo, vice-president at DALBAR's Canadian office. "Our mystery shoppers have been very clear in their feedback to us that while pricing was the initial hook that drew them to robo-advice, it doesn't necessarily supersede other important factors like access and ease of use." Lo adds that the shoppers valued reputation and trust more than DALBAR had expected, "which speaks to importance of building unwavering client relationships."

One of the main attractions of robo-advisors, particularly for millennials who are just starting out, is being able to invest in a diversified low-cost portfolio for only a very modest upfront investment. Exceptions identified in the study were WealthBar and RoboAdvisors Plus. The minimum investments for these firms are $5,000 and $25,000 respectively, which is very atypical for robo-advisors.

At other firms, minimum investments are not a deterrent, since they are either very modest or else there are no specific minimums. This makes robo-advisors a viable alternative for investors of modest means and whose financial-planning considerations are fairly basic.

In evaluating risk assessment, DALBAR instructed the mystery shoppers to ask for high returns over a short period. The shoppers found Invisor to be the most pro-active in calling clients to follow up on their risk-assessment questionnaires to identify inconsistencies in investor objectives.

For robo-advisors generally, a significant weakness identified by the shoppers was that they were not told to contact their firm if their individual circumstances change. This could result in investors hanging on to portfolios that are no longer suitable for their needs.

Investors, take note: Interacting via a chat room or through email won't eliminate the need to review your investment objectives at least annually or sooner if there are significant changes in your personal circumstances. It may not be convenient to communicate these changes promptly, but you don't want to risk falling through the digital cracks when it comes to maintaining a suitable portfolio.

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