How robo-advisors have it rough

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Online platforms may be on the rise, but the advisor-client relationship isn’t going anywhere.

“The prospect of fully automated advice is not something Canadians should expect in the near term,” says a draft report on fintech innovation by the Competition Bureau.

The comment is made in relation to suitability risk for robo-advisors, such as flawed algorithms. Further, investor recourse and enforcement is needed for robo-advisor users, says the report.

On the plus side for robos, the report notes that their KYC info is supervised using tech, which makes it easy to verify such info. In contrast, “the task of verifying exactly what was asked and said during an in-person conversation may be more difficult.”

Barriers to entry for robo-advisors
Overall, the report focuses on barriers to entry for fintech, also covering retail payments, and lending and equity crowdfunding.

For robo-advisors, the report classifies barriers as either attributable to regulation or not.

The following barriers aren’t directly associated with regulation:

  • Fee transparency. Embedded fees, for example, make it difficult for investors to know how much they pay, which in turn affects market competition.
  • Financial literacy and trust. Surveys show Canadians have low levels of financial literacy, says the report, so they place a lot of trust in advisors, affecting the benefits of disclosure.
  • Further, disclosure goes beyond price. “Consumers must be able to easily compare the levels of service between advisors, as well as price,” says the report.
  • Switching costs. Fees charged to close accounts can add up to thousands in some instances, again affecting market competition.
  • An associated concern is timeliness: “The bureau heard from some robo‑advisors that transferring funds from an account to their firm can take a long time, with manual transfers taking up to a month to complete,” says the report.
  • Tech impediments to switching. While e-signatures and electronic delivery of documents have been generally authorized, “some traditional advisors continue to require forms to be submitted in-person or via means other than electronic delivery, with a ‘wet’ signature needed to transfer certain accounts,” says the report.

These are examples of barriers resulting from regulation:

Suitability. Robo‑advisors in Canada must have advising reps (ARs) actively involved in portfolio decision-making. This could impede automated portfolio matching based on model portfolios and model investor profiles, says the report. Further, robo-advisors could face increased costs as they hire ARs to meet the obligation.
Lack of harmonization. A fintech firm operating across all jurisdictions will likely follow the most restrictive rules and regulations to simplify compliance, which impedes competition.

Recommendations to promote robos
Among other things, the report recommends regulators continue efforts to increase price transparency and plain-language disclosure; encourage investors to ask about fees and shop around for services; encourage the use of tech to facilitate account switching; provide clarity on regulation of robos; and allow firms to automate processes like analysis of KYC info.

On that last recommendation: “The risks related to recourse, redress and enforceability can continue to be managed by designating responsible individuals within a firm,” says the report.

Feedback on the draft report will be accepted until Nov. 20, 2017, by completing an online form or by sending comments to:

Competition promotion branch
Competition Bureau
50 Victoria Street
Gatineau, Quebec
K1A 0C9
Fax: 819-934-9293

The bureau will soon release a final report incorporating the views collected during the consultation period.

Transcontinental Media G.P.