To retain clients, think half-human, half-robot

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Perron & Partners Wealth Management is one of Calgary's top independent investment firms. Specializing in clients with assets in the millions of dollars, it provides high-touch service – customized portfolio management along with tax, financial and succession planning.

And yet the independent firm, which has more than $1-billion in assets under management, often turns away business.

"It gets a ton of requests, for example, to manage portfolios of clients' kids who have about $75,000, but it can't take them on because it isn't economical," says Erik Westblom, the owner of Radiata Consulting and a manager with Perron & Partners.

He specializes in fintech and is working to roll out a customized robo-advisor platform for the firm.

"Most of the advisory firms … probably turn away about 90 per cent of these referrals because they're too small."

Yet advances in technology, particularly automation software, are quickly shifting the landscape.

Robo-advisory firms, which offer low-cost, online wealth-management services using technology that automatically rebalances portfolios of exchange-traded funds (ETFs), have been quickly gaining market share among this demographic of investors. In less than five years, robo-advisories are expected to manage about 10 per cent of assets under management globally, BI Intelligence forecasts, growing to more than $8-trillion by 2020 from about $200-billion in 2016.

While perfectly suited to this large group of investors, the automation technology used by robo-advisors does not just offer savvy retail investors a less costly, easier way to invest. It also offers considerable upside for small, independent advisory firms.

And it's not just about integrating robo-advisory platforms into business models. It's also robo-administration, robo-compliance and ultimately leveraging the burgeoning field of artificial intelligence – machine learning – to improve the advisor-client relationship and, in turn, reap superior outcomes for wealth manager and investor alike.

The revolution is just getting started in Canada with forward-looking firms working now to adopt this hybrid model. Within the next few years, however, small independent firms will likely have no choice. Either they embrace this fast-evolving cyborg advisor paradigm or face extinction, says the founder of one of Canada's few artificial intelligence companies serving the industry.

"We've spoken to a few advisors – guys in their 50s and 60s – who will always say, 'We don't do robo' or 'We don't do digital service,' but they're missing the point because it's not about robo-advising," says Davyde Wachell with Vancouver-based Responsive Capital Management Inc.

"It's about using a tool to take the pressure off your business, saving time and money."

Already small firms are being squeezed by growing competition. Large wealth-management firms are eating into their high-net-worth client base while robo-advisors erode their market share of small and mid-sized investors.

One of the Responsive Capital's early adopters, Perron & Partners recognizes the perils that lie ahead.

More importantly it also realizes the opportunity, Mr. Westblom says. Technology can help it sign up new clients quickly – especially those with smaller accounts – and then manage their portfolios efficiently and prudently using a hybrid robo-advisor platform that mixes passive and active strategies.

From automating day-to-day administrative tasks to portfolio rebalancing, the firm views automation as a time and money saver.

"If you have an advisor with whole bunch of clients with small accounts, they can manage their money with a robo-advisor platform," he says. "And then advisors can focus on the auxiliary services like tax, cash flow and estate planning."

While large players have rolled out robo-advisor technology, including RBC Wealth Management, which recently licensed its U.S. client platform from BlackRock, the founder of one of Canada's first robo-advisor firms, says small independents have a unique opportunity because they can often adopt new fintech infrastructure faster and more efficiently than the giants of the industry.

"The bigger the company the more complex it is and the harder it is to change," says Chris Nicola, co-founder of WealthBar, a robo-advisor investment service based in Vancouver. With the big financial institutions, "there are more people involved, and more steps to approval."

In contrast, smaller companies have tightly integrated teams where the compliance officer, for instance, is working alongside the technology team.

Mr. Nicola adds that small companies do not have "the legacy of older technologies [that] banks may have developed in some cases decades ago that keep them from moving forward quickly."

Like Responsive Capital, WealthBar sees fertile ground in providing automation and artificial intelligence technology to small-scale advisors. Often these include automating simple tasks such as e-mailing clients to ensure their life situations have not changed, which in turn could require changes in the structure of their portfolios.

Mr. Wachell says automating these services is fairly elementary, involving rules-based programming, but the industry is headed toward increased use of a more advanced form of artificial intelligence – deep learning – that can mine big data to understand client behaviour better and help avoid some of the common killers of wealth.

"Liquidity needs are what kills a portfolio, so is there a way for our machines to detect those liquidity needs in advance and insulate the portfolio before the crisis happens?"

Suppose a client is laid off and living on short-term savings and credit cards for several weeks. An AI-driven wealth platform would be able to infer the client may need to sell investable assets to raise cash, based on cash-flow patterns. The program then alerts the advisor, who calls the client, mentioning "it's been awhile and maybe it's a good time to come in," Mr. Wachell says.

In turn this can help avoid last-minute requests for cash, which might occur during a down market and result in steep losses.

To do this, however, clients will have to agree to their personal data, such as social media behaviour and credit card spending, being aggregated and analyzed. But that's a sign of the times, Mr. Wachell adds.

"If we want to use apps to help us manage our lives in a profound manner, then we need to surrender a bit of that comfort of keeping things secret."