Month: March 2017

Repel the Robo Horde

The investment industry continues to experience seismic shifts that do not appear to be abating any time soon. Besides the seemingly never-ending onslaught of compliance macerations, we have the evolving battle between active and passive investment management.   Also, advisors are increasingly competing with a new and emerging adversary – robo advisors, the “next” devourer of the advisory business. 

Smart advisors should not ignore this threat but instead move to either join the trend or beat the robos at their own game. First advisors need to understand what they are up against. Robo advisors are really just a low cost vehicle that promises to remove the human emotion from the investment process. As research has shown time and again, individual investors have been their own worst enemies, so automated assistance could appear very attractive. But the robos principal strengths (i.e. attractive interface and simplistic automation) are also their biggest flaw because they are inflexible. 

Clients don’t know what they don’t know. Wealth management is not their focus or expertise so they don’t know what questions to ask and robo advisors are generally not very helpful in this regard. They simply cannot offer the personal touch necessary (or if they can it is seldom from the same person each time; similar to your local bank branch).

Robo advisors are starting to sprawl across the world. They are multiplying with increasing speed as financial firms see the opportunity for easy pickings and the chance to get in on the ground floor of a new disruptive service. However, much like Lemmings seeking new pastures to inhabit, the robos’ journey, well-intentioned as it may be, could lead to a very unhappy ending for clients that join them on their pilgrimage.

While it is generally true that robos are “perceived” to be cheap and have simple processes, that is not the be-all and end-all. Something called “value for the money” plays an integral role in the satisfaction of a client’s experience. For many clients value is generated by the care and concern that come from human advisors. In fact, the value of human touch was supported by a 2016 Gallup survey, “Robo-Advice Still a Novelty for U.S. Investors”, where people were asked to rate which qualities were more applicable to robo advisors or human advisors. Unsurprisingly, human advisors outranked robos in nine out of 10 qualities as shown in the table at the bottom of this page. 

Robo advisors essentially try and use the same approach that investment professionals use to aid them in their investment decisions. The main difference lies in the manner in which a client’s money invested; robos merely utilize the algorithms to invest client’s assets. They lack the ability to assist customers with their tax, retirement, and estate planning needs. As well, the robo model has worked fairly well as long as the stock markets keep going up. But declining markets could adversely affect clients of the index-pegged robos. And like the Lemmings, robos could just lead their clients into even deeper water as they struggle to overcome bear market volatility. 

Traditionally, the size of an investment portfolio was directly proportional to the quality of the advice provided. The robos continue this tradition.  However, this reality has opened the door for new and superior services like the Transcend Pay-for-Performance™ platform that assist advisors with low cost, alpha generating strategies. In the long run, traditional advisors will likely co-exist with robo advisors; but too much machine and too little human touch will not ultimately win the day.

Human advisors vs. Robo advisors table

The Drawbacks of Mutual Funds

The world’s first mutual fund can be dated back to 1774. These investments were backed by income from plantations and were an early version of today’s mortgage-backed securities. A lot has changed since then, and we’re faced with tons of choices of where to invest our money. Mutual funds might be ‘safe’, but not always the best option to grow your finances. Make sure you understand their serious drawbacks:



Like any investment, it’s crucial to be aware of the fees you’re paying. Most mutual funds charge management and operating fees, which pay for the fund’s management expenses. In addition, some charge sales commissions and redemption fees. Some funds buying and trading so often, transaction costs can add up significantly.



Although mutual funds are highly liquid, most cannot be bought or sold in the middle of the trading day. You can only buy and sell them at the end of the day after they have been calculated at the current value of their holdings. Mutual fund managers trade frequently, as they respond to redemption and investment requirements of the fund they’re managing. What does this mean? Higher turnover generating higher tax liabilities and increased costs.



Managers of mutual funds make all of the decisions about when and which securities to buy and sell.  When it comes to building wealth, this is not advantageous as it isn’t personalized for your specific needs. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you.



Returns on a mutual fund are not guaranteed. On average, 75% of all mutual funds fail to beat major market indexes. When deciding on which fund to buy,  research the risks involved and make sure to review past performance.
What’s our opinion?  We suggest our clients use separately managed accounts. With a SMA, you have access to some of the best money managers in the industry with proven track records for providing reliable risk-adjusted returns. You own the individual securities directly and fees are deductible on your tax return, further reducing cost. All fees are fully disclosed and the relationship between you and your investment advisor is open and all about your needs and priorities for timing. Before you invest, do your homework and look at the fund’s history of gross performance– the facts should speak for themselves.

Canadian Stocks In Great Shape

Why are investors still waiting for a correction? Some investors would like to see a pullback to cool off the  white hot equity markets, but they may have to wait a little longer.  This is because  without a yield curve inversion there will be no correction. This mantra remains as  true today as it did 47 years ago. The yield curve is one of the most reliable  economic indicators and one that savvy market watchers always keep on their  radar. Sure this bull market may be long in the tooth, but the Canadian stock  market just reached its first all-time high since 2008.

The yield curve indicates the difference between short term cash yields and long  term bond yields. It is an excellent tool for predicting the direction of the economy.  Typically, short term interest rates are lower than long term rates, so the yield  curve slopes upwards, reflecting higher yields for longer term investments. This is  referred to as a normal yield curve. When the spread between short and long term   interest rates narrows, the yield curve begins to flatten. Lastly, when short term   rates move above long term rates the curve becomes inverted and this is a major signal that a slowdown is likely. It is no wonder that an inverted yield curve produces so much fear.

The yield curve has an excellent track record of predicting the top of the stock market over the past 47 years and it is not signaling a bear market now. We are currently in the longest period without an inversion since 1970; while concerning for its longevity, it does not mean much since an actual inversion is the only true signal. The yield curve inversion usually takes place about 12 months before the start of a recession, but the lead time ranges from 5 to 16 months. The peak in the stock market comes around the time of the yield curve inversion, just ahead of a recession.

The chart to the right illustrates the spread between 3 month T-bills and 10 year bonds for the past 47 years and when that differential has turned negative (or inverted). The chart also compares this spread to movements in the S&P/TSX Stock index. The yield curve had been flattening until August 2016 as bond investors started to worry about when the Bank of Canada (BOC) would begin hiking its lending rate. Since then the curve has moved upward as longer bond yields have increased while short term rates remained steady.  It appears that we are still a long ways from inverting. If the BOC aggressively hikes its key policy rate and short term yields rise swiftly, they would have to increase yields by 1.1% (assuming bond yields stay the same) before the yield curve becomes inverted. This will likely not occur quickly; as the consensus remains that the next hike is a long way off.

Investors may hear cries from many circles to ignore the yield curve and that “it has lost its edge” as a leading indicator. Do not believe them; it has called each of the last 10 recessions since World War II with precision. The yield curve is an invaluable forecasting tool for predicting recessions and stock market corrections and is equally as important for what it predicts when it is not inverted: a bull market or continued strong period for equities. So based upon what the yield curve is telling investors currently, this bull market has more room to run because a bear market will not come until the yield curve says so.


This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.