Fintech: the banking sector’s new battleground

What are the real costs of no-fee trading and robo-advising services?

Tea Nicola, WealthBar’s co-founder and CEO: “I think that the natural evolution of robo-advice will be hybrid advice” | Rob Kruyt

Fintech’s deceptively diplomatic connotation masks a battle brewing between traditional finance firms and the new financial technology generation.

Technology has introduced a more user-friendly experience to the financial sector, businesses and consumers, and that is rattling the walls of the traditionally staid banking sector.

However, as the tech industry has learned, a user-friendly experience is not the same as a user-focused one.

Consider robo-advising. The use of computer algorithms and artificial intelligence to take the trader out of trading has opened the doors to low-fee trading options that offer financial and trading services to low-value investors. But the lower fees might still not be low enough.

In late August, Canadian online investment management firm Wealthsimple Financial Inc. and the Boston-based Fidelity Investments Inc. began offering investors no-fee trading options.

But the no-fee description is open to debate. The pricing structure of these trades includes a percentage fee on the assets under the firm’s management. In addition, the exchange-traded fund used charges an additional annual percentage. The total charges for the investment are roughly the same as standard industry fees.

“In total your fees are getting up to 0.6% or 0.7% depending on how much money you have in your account,” said Matthew Unger, founder and CEO of iComply Investor Services Inc. “The interesting thing is, this is no different than what most Investment Industry Regulatory Organization of Canada firms do.”

Unger added that removing per-trade fees and introducing algorithms aren’t necessarily new to the financial industry. Lower trading transaction fees were introduced roughly a decade ago with the widespread adoption of e-trading.

Unger said that back then, banks were implementing pricing structures similar to what Wealthsimple is using today.

Companies ranging from Vancouver fintech startups to large established banking titans are now employing robo-advising strategies.

Unger said robo-advising eliminates the traditional personal adviser who takes into consideration an investor’s unique tax and estate situation. Low-fee and no-fee advising relies on algorithms to balance portfolios. If a stock goes up by a certain amount, the algorithm will sell off the investment and put the money into one of the funds that is down.

WealthBar, a Vancouver-based online investment firm, addressed these shortcomings early on. The company was started with the goal of democratizing investing and financial planning and making it more accessible to low-value investors – a goal it believed was unachievable through artificial intelligence and robo-advising alone. As a result, Tea Nicola, WealthBar’s co-founder and CEO, set out to create a company that combined the strengths of robo-advising technology and traditional financial planners, essentially developing a business plan that has been adopted by other industry players.

“I think that the natural evolution of robo-advice will be hybrid advice where there is a human involved in some level,” said Nicola.

The service gap between robo-advisers and traditional brokers has led some fintech companies to partner with traditional finance industry players. Soon after it was founded, WealthBar partnered with Nicola Wealth Management, whose CEO, John Nicola, is Tea Nicola’s father-in-law.

Nicola said each sector can bring its expertise to the developing industry. The tech industry understands how to create an intuitive user experience that would be difficult for an established financial firm to create in-house, while financial services companies bring a customer base and distribution that would be difficult for a tech startup to establish.

WealthBar is not the only company attempting to combine these functions and services. Earlier this year, a merger was announced between two traditional finance industry firms and an online trading fintech company to create Aviso Wealth, a company aimed at bridging the gap.

The Vancouver based online e-trader Qtrade Financial Group partnered with Credential Financial and NEI Investments to offer low-fee online trading alongside a product combining new and traditional forms of financial advice.

According to Catherine Wood, vice-president of Qtrade Investor, by combining traditional financial planning with robo-advising, the company can compete with the big banks and their hybrid investment service offerings.

The popularity of no-fee trading and robo-advising is increasing but debate continues over their long-term viability.

“It wouldn’t be surprising to see the no-commission offering catch on with a niche of stock traders,” said Wood. “However, most self-directed investors still expect a robust service that includes a variety of tools along with good client services and educational support.”