Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Make Way For The Robo Generation

MEDA 2015-02-04 The Robo Generation(header1)

Andy Holloway

Read original article online | View article in PDF format

MEDA 2015-02-04 The Robo Generation(header)

John Nicola has built up a sizeable firm dedicated to mostly serving the needs of high-net-worth Canadians. In the past 20 years, Nicola Wealth Management has grown from a startup to one of the country’s bigger independent money managers with more than $3 billion in assets under management and over 100 employees in Vancouver, Kelowna and Richmond, B.C., and, as of 2014, Toronto. The target clients are business owners and professionals with investable assets of $1 million or more who need investing advice, but also a healthy heaping of financial planning that includes tax structures, insurance and retirement benefits.

By its very nature, Nicola plies his trade in a niche market, to be sure, and a high-end one that is mined by several other firms, including offshoots of the big banks, who have been known to sniff around independents such as Nicola from time to time. Nicola’s offering certainly doesn’t have mass appeal, given its target audience, although there’s no doubt the average Canadian needs quite a bit of the same advice that it dispenses to the 1%. But Nicola has now invested in a new offering that could appeal to the other 99% of investors, and perhaps even a chunk of his current wealthy clients to boot. It’s a robo-advisor called WealthBar Financial Services Inc. and it’s headed up by Tea and Christopher, his daughter-in-law and eldest son, respectively.

“I didn’t just invest in Christopher and Tea because they’re related to me,” Nicola says. “I explained to them that I would have made an investment in any online advisory model as, quite frankly, a defensive decision with respect to the way Nicola Wealth Management runs itself and also because I think it’s going to be a very successful business. Somebody is going to make this really successful.”

Robo-advisors are the latest evolution of online financial advice services, and use software algorithms to assess investor risk profiles and then advise them about which investments — typically a group of exchange-traded funds that can include stocks, bonds, real estate, alternative, commodities, and even a little cash — to hold. Such services have blossomed in Canada during the past year, following a similar trend in the U.S. where companies such as Wealthfront, which has raised US$105 million in financing in the past year, and Betterment have made names for themselves. Even venerable Charles Schwab & Co. has announced a competing service called Intelligent Portfolios, which validates the concept at the very least and proves that the established wealth managers are paying attention.

But WealthBar has a twist on the model since it also uses human advisors to help clients with more complex areas including insurance needs, how to best use tax-exempt accounts such as RRSPs, TFSAs and RESPs, and how much they should be saving to achieve their goals. “We separated what we offer into two sides that are connected,” Chris says. “One is the investment management side, which typically gets referred to as the robo-advisor side, which is that fund-of-ETFs approach, low-cost investment management. The other side is financial planning and Tea takes the lead on all of the financial planning.”

Chris’s statement is not particularly self-effacing. He’s an engineer by training, just like Tea, taking electrical engineering/applied math and mechanical engineering, respectively, at Queen’s University in Kingston, Ont. Chris even ended up with a master’s in applied math. Both ended up working in the technology industry, but both also worked on and off at Nicola Wealth Management. Chris started building software and systems to help solve some of the company’s internal efficiency issues, while Tea worked in various back-end administrative and processing functions. One notable summer project that they worked on together was converting all the company’s current and future paper files into searchable PDFs, a system that is still used today. “Real estate in Vancouver is quite expensive, so the project allowed Nicola to release quite a lot of real estate in the office and allowed for some expansion and new hires as a result,” Tea says.

But at the back of their minds was an idea to start a technology-focused firm that could offer many of the same services that Nicola Wealth Management offered, but with a different demographic in mind.

“This always came back to us starting in the early 2000s and spending time with my dad talking about their technology platform and how to move the advisor more online, move more of the relationship online, give the client more access to the information online,” Chris says. “Nicola Wealth wasn’t an option for most of our colleagues and friends, but we wanted to be able to offer the same types of investing strategies, the same types of financial advice, but targeted at that market.”

The challenge, of course, is that much of the investment industry is based on face-to-face consultation and moving paper or spreadsheets around. “We realized we needed more automation, better reporting, better systems,” Chris says. “We started from scratch. We didn’t transfer over any IT or technology from Nicola. We started building it brand new. Technology changes so fast so there were huge advantages in us just getting everything done greenfield, as they say. But what we learned at Nicola was valuable.”

Oddly enough, John Nicola initially started in science as well. After winning a physics award in high school, he took physics/math at university, but it wasn’t for him. Nor did he see a future playing bass in a rock band that helped him pay the bills for a couple of years. But the band’s lead guitarist was instrumental in helping John start his financial career by urging him to join Metropolitan Life as a salesman. “I was 22, I was single, I had no debt, but no assets. I hated insurance… I didn’t know much about it, but I was pretty sure I hated it,” Nicola recalls. “But he said it’s $640 a month. That sounded pretty good back in 1974. I was 22, my manager was 19.”

He quickly left, however, after finding out he could only sell Metropolitan’s products and joined a brokerage. “I’ve only worked for an employer for one year of my 40 years,” John boasts. He joined Jim Rogers at Rogers Group Financial in 1984 and became president in 1989, before starting his own firm in 1994 with about $80 million in assets under management. The key to his success, however, was when he switched to a fee-only portfolio manager platform in 1999.

Nicola’s sweet spot is the high-net-worth space, but that’s not all he goes after. Among the firm’s 1,500 clients are about 400 “future profile” clients who are young professionals just starting their careers, so they are nowhere near $1 million in assets. The strategy seems to work since Nicola boasts that his firm has a 99% customer retention rate, no doubt solidified by their investment returns. Nicola estimates his average client will end up with a net return (that is, after fees) of 7.5-8%. Its worst year was 2008, when Nicola’s accounts were down an average of 6.5%, but that stacks up pretty well since the S&P 500 cratered by 38.5% and the TSX Composite dropped 35%.

Most of Nicola’s 110 employees are client facing, with one-third of an advisor’s time spent on dispensing investing advice and the other two-thirds spent on financial planning items. A team of 15, including Nicola and chief investment officer Rob Edel, make decisions about the investment strategy, whether it’s equities, bonds, private equity, real estate or mortgage funds.

WealthBar is much leaner. It has just eight people on staff including portfolio manager Neville Joanes, who is a CFA and was chief compliance officer and a portfolio manager for a company recently acquired by Fiera Capital. Tea, meanwhile, is two exams away from becoming a chartered investment manager. “Between Neville’s experience and education and my starting to learn on the go, we make a pretty good team,” Tea says.

Like Nicola, WealthBar charges a flat percentage fee for its services. Clients with less than $5,000 to invest can even get a free professionally reviewed financial plan, access online planning tools and a TFSA starter account. For those with more than $5,000, WealthBar charges a sliding rate of 0.6% to 0.35% at the high end for clients with more than $500,000. At that level, investors get yearly financial plan reviews, online planning tools and a balanced ETF portfolio that is automatically rebalanced with all trading fees included, as well as services such as tax optimization, insurance needs analysis, tax loss harvesting, corporate tax planning and estate planning.

Of course, selling ETFs in Canada, even when offering extra financial services, is no easy task. The country’s mutual fund market is now well over $1 trillion, while ETFs were at a paltry $75 billion as of the end of November 2014. Nevertheless, Tea believes WealthBar can grow its assets under management to the tens of billions of dollars in the next five to 10 years. “We really feel we can go after a good sizeable chunk of the forgotten clients who are left, people who have been with the big companies and gone through advisor after advisor and they’re paying a lot of money and not being serviced,” she says.

There are at least three other robo-advisors in Canada: ShareOwner, which has offered a portfolio building service for several years and started a robo-offering last year, Nest Wealth and WealthSimple, whose CEO Michael Katchen told Financial Post Magazine that he believes he can grow the firm to $1 billion in assets within two years and $1 trillion in the next 10 years, an astounding growth rate. By comparison, John Nicola believes his HNW firm can grow at between 10-15% a year, which means its assets would double every five to seven years.

But robo-advisors face a number of hurdles, not the least of which is Canadian investor inertia. “They’re like the frog in a pot of boiling water; they really need something to drag them out of there,” John says. “Robo-advisors are going to have to go out and get the business. They’re going to have to sell and sell and sell. Get referrals. Do a lot of hard grinding work to get to a critical mass, after which, they will probably get viral and organic. But the startup phase is going to be really challenging.”

Another reason for the slower growth of robo-advisors in Canada than in the U.S. is the relatively slow adoption of exchange-traded funds, the bedrock of robo-advisor portfolios. Chris believes one of the reasons ETFs haven’t taken off in Canada is that investors are uncomfortable buying them on their own. “Canadians want an advisor and even though when they buy a mutual fund they aren’t getting in-depth financial advice with it, they feel like something happened there,” he says. To be fair, though the idea of ETFs is fairly simple, there is still an education process to be done, something that can go hand in hand with teaching investors about the robo-advisor model. WealthBar, for example, does seminars and lunch-and-learns with individual companies to get in front of people. “There’s still a need for a bit of face to face, especially at this stage, to make people aware of what we do,” Tea says.

After that, it’s going to come down to the different target markets, pricing models, strategies and services offered. “Our focus is definitely on holistic broad-based financial planning and services and trying to make that scaleable in Canada,” Tea says. “We’re increasing efficiency on the full-service model by an order of magnitude versus some of the other robo-advisors who might be a low-cost model fund of funds, just technology driven. We’re trying to marry all three pillars — insurance, investment and the planning — together so people can get help in the context of their lives.”