Can Robo-Advisors improve Canadian’s pension income?

KEY HIGHLIGHTS FROM OUR OCTOBER 20, 2021 DISCUSSION ON ROBO-ADVISORS

 

GRI was pleased to host John Turner from the Pension Policy Center on October 20th, 2021, who shared highlights from his recent work titled “Robo Advisors for Canadian Pension Participants” . We are also very pleased to have Jillian Kennedy, Partner at Mercer's Wealth Business and Nauvzer Babul, Founder and CEO at Smart Money Capital Management, join the panel discussion and share their perspectives on the role of robo-advisors in improving pension income for Canadian pension participants.

The following are some key takeaways from John’s recent publication:

  • From starting at zero, Canadian robo advisors have grown rapidly. By the end of 2020, they had more than $11.4 billion dollars in assets under management.
  • The basic level of service for robo advisors typically charges substantially less than human advisors.
  • Robo-advisors are less likely to have the potential for biases against clients by age, gender, race, or whatever bias that might affect some advice.
  • They reduce the need for financial literacy at the level of managing your pension investments.
  • Leading robo-advisors in Canada had twice as many new clients in March 2020 than before the pandemic.
  • A general problem with defined contribution plans is how to disperse the money to participants in retirement. John proposed two solutions (1) robo-tontines (2) deferred annuities.

High-level perspectives from Panel discussion

[Development of Canadian Robo Advisors]

  • The 1990s witnessed a shift away from defined benefit pension programs. Canada hadn't had any type of guidance in defined contribution plans or put a group-like workplace plan in place until about 2004. Around the year 2000, insurance companies created a tool for employees to pick funds, which is a three-tiered structure. 2009 witnessed a major shift away from these types of tools as target date funds enter the Canadian market.
  • Among all Canadian robo-advisors we see threefold (1) navigating clients away from traditional advice; (2) acquisitions through some of the big advice; (3) complimentary robo-advisors, like Smart Money, that managed to find ways of helping traditional advice.

[Investment Companies vs FinTech Start-ups]

  • Many large investment companies like Vanguard now have their own robo-advisors.
  • Canadian insurance companies manage probably over 90% of workplace program assets that are considered to be defined contribution or savings plans. They get extremely low fees, with the access to very high-quality investment product that an individual could not invest in.

[Longevity risk and changing nature of labor income]

  • Tontines could be an a very innovative way that robo-advisors could go, but that would require a complete and total restructure of the fund itself.

[Trust for pensions]

  • A younger age demographic is more open and willing to trust, a digital platform. It has been demonstrated that as people get closer to retirement, or in that age demographic, they prefer to have more and more human interaction.

[Challenge and opportunities of robo-advisory services]

  • One of the challenges is about trust. How to show those clients that this is a trustworthy alternative to human advice.
  • Robo advice plays a very important part in the journey of financial wellness and getting that confidence and control back, however, the gap is where does this fit in that journey?

 

 

John Turner
Director of the Pension Policy Center

 

 

 

Jillian Kennedy
Partner in Mercer's Wealth Business
Canadian Leader of Defined Contribution
and Financial Wellness | Mercer (Canada) Limited

 

 

Nauvzer Babul 
CEO at Smart Money Capital Management