eResearch | On July 16, 2019, J.P. Morgan Chase & Co. (NYSE: JPM; LSE: 0Q1F; “JPMC”) launched “You Invest Portfolios”, a robo-advisor platform that utilizes algorithms to actively re-balance diversified portfolios of the Company’s Exchange Traded Funds (ETF). Clients must have at least US$2,500 of investment capital to be eligible, and will be expected to pay 35 basis points in annual fees. Unlike most robo-advisors, the Company will cover all expenses related to the underlying investments, which it estimates will cut investor’s costs by 15 basis points.
JPMC’s robo-advisor introduces a portfolio that is compatible to a client’s risk appetite by asking a set of predetermined questions that are used to analyze the client’s financial goals, risk tolerance, and time horizon, which are then used to decide on an optimal portfolio allocation between equities and fixed income. The Company has four ETF portfolios that it uses for its robo-advisor services, which include: Conservative, Moderate, Growth, and Aggressive. The “Conservative” portfolio allocates 25% into equities and 75% into fixed income, whereas the “Aggressive” portfolio allocates 90% into equities and 10% into fixed income. Once a portfolio is assigned to a client, simple user dashboards and gamification is used to facilitate active awareness and understanding of the client’s investment performance.
JPMC has been developing this platform for several years in response to the growth in Assets Under Management (AUM) within the new robo-advisor segment of wealth advisory. According to A.T. Kearney’s research report, robo-advisors are expected to grow to US$2.2 trillion in AUM by 2020. In 2018, the largest robo-advisor based on AUM was The Vanguard Group, with US$101 billion.
The growth in robo-advisory can be attributed to investors seeking lower management expense fees, increased transparency in their portfolio holdings, and an option to invest with smaller principal in capital. Individuals under 30 are a focused target market for these robo-advisor products, as only 31% within this age group invests into stocks due to hurdles such as lack of knowledge and limited capital.
An example of an early leader in the industry is Wealthsimple Inc., a Canadian robo-advisor that was founded in 2014, supported by a strategic partnership with Power Financial Corp (OTC: POFNF; TSX: PWF; DB: PWF) in 2015, who invested C$165 million (89% ownership) across four tranches between 2014 and 2018. It has zero minimum capital requirements, but the annual fees are higher at 50 basis points compared with JPMC’s 35 basis points. Wealth Simple currently manages more than C$4 billion AUM with expansions internationally in the United States and the United Kingdom.
Moving forward, banks and firms are starting to realize that there may be an optimal balance between the quantitative benefits from automated portfolio management and the qualitative benefits from face-to-face financial advisory. Therefore, robo-advisors such as BMO Smartfolio, a hybrid model developed by the Bank of Montreal (NYSE: BMO; TSX: BMO; LSE: 0UKH; DB: BZZ), are gaining popularity, in which automated algorithmic re-balancing of portfolios are paired with human advice. This optimizes the time spent by the human advisor, allowing them to focus on financial advice and relationship management with an increased client load, rather than simultaneously managing all the client’s portfolios.
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J.P. Morgan Chase & Co. (NYSE: JPM; LSE: : 0Q1F )
Headquartered in New York City, United States, J.P. Morgan Chase is a multinational investment bank, and ranked as the sixth largest bank by S&P Global. JPM currently trades at US$113.90 with a market capitalization of US$369.4 billion.
Power Financial Corp. (OTC: POFNF; TSX: PWF; DB: PWF)
Headquartered in Quebec, Canada, Power Financial Corp is a subsidiary of Power Corporation of Canada, and is a multinational investment management and holdings company focused on the financial services sector in Canada, the United States, and Europe. PWF currently trades at C$29.68 with a market capitalization of C$19.7 billion.
Bank of Montreal (NYSE: BMO; TSX: BMO; LSE: 0UKH; DB: BZZ)
Headquartered in Quebec, Canada, Bank of Montreal is Canada’s oldest bank. It has a hybrid robo-advisor model, which recently reduced its account minimum by 80 percent, from C$5,000 to C$1,000 to attract more retail investors. BMO currently trades at C$99.46 with a market capitalization of C$63.5 billion.
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