A standard investment industry putdown of robo-advisers is that they lack the human touch.
But if human advisers care so much about their clients, why aren't they doing more to reduce the fees that clients pay to own the investments in their portfolio? There's good reason to ask this question after the robo-adviser Nest Wealth announced last week that it has updated the list of exchange-traded funds it uses for client portfolios in a way that will reduce fees by an average 28 per cent.
There are fee-conscious investment advisers out there. One of them contacted me last week to complain how one of the mutual fund companies he uses has adjusted pricing for high net worth clients in a way that could actually make them pay more. But if I had to rate the fee sensitivity of advisers on behalf of clients overall, I give them a 2 out of 10. This is based on the billions of dollars sitting in over-priced mutual funds.
Clients of robo-advisers pay a modest fee to have their portfolios managed, plus additional costs for the ETFs used in those portfolios. The more robos can squeeze their fees, the more attractive they are as an alternative to traditional advisers. The advice fee can only be reduced so far in an industry that is still struggling for profitability. This leaves ETF costs as the best option for lowering costs to clients.
Nest's new lineup is a model of simple, low-cost investing. Funds from the BMO, iShares and Vanguard families are used, all with management expense ratios ranging from 0.05 per cent at the low end to 0.39 per cent at the high end.
Nest says that if clients' fees are lower, their portfolios can grow larger. I'd like to be able to say this is so basic as to be laughable. But in the traditional advisory business, fees are too often glossed over or ignored. High-cost products are sold when comparable or better low-cost alternatives are available. Sometimes it's greed – the high fee products may pay better commissions. And sometimes it's laziness or ignorance.
The human touch in the investment advice biz means giving a darn about how much your clients pay to invest.
Rob Carrick