Bank of Montreal Enters Robo-Advising Ahead of Other Lenders

  • BMO SmartFolio competes with Wealthsimple, other online rivals
  • Bank sees platform appealing to millennials, new investors

Bank of Montreal starts signing up customers for its automated low-fee investment-advice platform this week, making the lender the first of Canada’s big banks to embrace a robo-advisory business.

“It’s really an area that we’re predicting great growth," Joanna Rotenberg, head of personal wealth management at the Toronto-based bank, said in an interview. “We think there’s a segment who’s going to be very interested in this type of service. I would expect some of them would be new to investing, and that’s part of the idea of the service.”

BMO SmartFolio offers automated investing online in five portfolios comprised of the firm’s exchange-traded funds. Following a month long trial with employees, the platform is now available to customers willing to invest at least C$5,000 ($3,443). Fees are 0.7 percent for the first C$100,000, or a minimum C$60 a year, and the rate declines as balances increase.

Bank of Montreal joins at least seven online portfolio-management platforms in Canada that have emerged in the past two years, including Wealthsimple Financial Inc., Nest Wealth Asset Management Inc. and Questrade Financial Group Inc.’s Portfolio IQ. Canada is following the U.S., where startups such as Betterment LLC, the New York-based firm that began in 2010, and Silicon Valley-based Wealthfront Inc. have popularized robo-advice.

Bank of Montreal shares rose 0.5 percent to C$71.22 at 9:46 a.m. trading in Toronto. The stock has fallen 8.7 percent this year, compared with the 8.1 percent decline of the eight-company Standard & Poor’s/TSX Commercial Banks index.

Early Days

National Bank of Canada added a platform in October 2014 called InvestCube that automatically rebalances ETF portfolios, though the Montreal-based lender doesn’t consider it a robo-adviser because it doesn’t offer advice. Canadian regulators require robo-advisers to have a higher degree of contact between clients and the portfolio manager overseeing the investments than those in the U.S.

“Robo-advice is on the radar of most firms,” Brett McDonald, a senior analyst with Investor Economics, a Toronto-based research firm that tracks financial wealth. “You’re going to see firms start to see how they can incorporate some sort of digital offering into their services."

Robo-advisers in Canada have attracted “several hundred million dollars" out of about C$3.6 trillion of investable assets in the country, McDonald said. By comparison, about C$1.3 trillion was held in mutual funds at the end of November, according to the Investment Funds Institute of Canada.

U.S. Industry

Robo-advisers typically use algorithms to offer investment advice online with little or no human contact. Customers provide their age, income, risk tolerance and goals online through a smartphone, tablet or computer. The platforms typically charge annual fees of 0.3 percent to 0.7 percent of assets depending on balances, undercutting full-service brokers, which in Canada typically charge fees above 1.25 percent. The gap can be greater because the ETFs used by robo-advisers are cheaper than most mutual funds, which in Canada carry average fees of around 2 percent.

The industry in the U.S. has grown from almost nothing in 2012 to a projected $300 billion in assets under management at the end of 2016, according to a June report from A.T. Kearney. U.S. banks, which have viewed the online platforms as a disruptive technology, are starting to get on board. Bank of America Corp. is working on an automated investment platform this year for Merrill Edge, which targets accounts under $250,000. Executives at Morgan Stanley, which owns the U.S. brokerage with the most human advisers, and Wells Fargo & Co. recently said they’d develop or buy a robo-adviser.

Wealthsimple, one of Canada’s largest robo-advisers, has gained more than 10,000 customers since its September 2014 start and has C$400 million of client assets. The Toronto-based firm has also attracted C$30 million in financial backing by Power Financial Corp., owned by Canada’s Desmarais family.

Wealthsimple Chief Executive Officer Michael Katchen said he’s excited to see Canadian banks push into the online platforms because it’ll expand interest in the business and benefit investors.

“Our clients are primarily young professionals -- they don’t have a huge amount of assets yet so they don’t really qualify for the banks’ advice channels," said Katchen, adding that 80 percent of his firm’s clients are under age 45. “We service that market better than anybody else and I don’t think the banks are really going to change the way they’ve done that just yet."

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