A Canadian regulatory nuance may make it challenging for robo-advisors to service large numbers of clients
US robo-advisors are able to serve massive numbers of investors, but Canadian robo-advisors are unable to do so, according to a commentary on the Globe and Mail.
The piece cites as an example Betterment LLC. The largest robo-advisor in the US, it employs 136 people to manage US$5 billion in assets for 130,000 clients. Only eight of the employees are licensed to provide investment advice, and seven are licensed salespeople, meaning that 15 license-holders are servicing almost 9,000 clients each.
Regulatory obligations prevent Canadian robo-advisors from pulling off the same feat. “In Canada, robo-advisers must register as portfolio managers, which cannot opt-out of their legal fiduciary duty,” wrote Dan Hallett, CFA, CFP. The fiduciary duty that would impact scalability, in this case, is the obligation to have meaningful discussions with clients about their investments.
“If [Canadian robo-advisors] grow as planned, they will need tens of thousands of clients to succeed financially,” Hallett said. “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.”
Hallet discussed the case of Wealthsimple, which reportedly has 20,000 clients investing an average of $25,000 each; the firm 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.”
The growth challenge from this compliance requirement may affect not just robo firms’ growth prospects, but also their investors. “[I]f 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,” said Hallett.
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The piece cites as an example Betterment LLC. The largest robo-advisor in the US, it employs 136 people to manage US$5 billion in assets for 130,000 clients. Only eight of the employees are licensed to provide investment advice, and seven are licensed salespeople, meaning that 15 license-holders are servicing almost 9,000 clients each.
Regulatory obligations prevent Canadian robo-advisors from pulling off the same feat. “In Canada, robo-advisers must register as portfolio managers, which cannot opt-out of their legal fiduciary duty,” wrote Dan Hallett, CFA, CFP. The fiduciary duty that would impact scalability, in this case, is the obligation to have meaningful discussions with clients about their investments.
“If [Canadian robo-advisors] grow as planned, they will need tens of thousands of clients to succeed financially,” Hallett said. “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.”
Hallet discussed the case of Wealthsimple, which reportedly has 20,000 clients investing an average of $25,000 each; the firm 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.”
The growth challenge from this compliance requirement may affect not just robo firms’ growth prospects, but also their investors. “[I]f 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,” said Hallett.
Related stories:
Are robo-advisors and CRM2 effective among investors?
Study finds gaps in robo-advisor industry
