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Robo-advisers' game plan to survive a bear market hinges on educating clients

Robo-advisers' bear market game plan

OTTAWA — With stock markets trading at or near all-time highs, robo-advisers are working at educating clients to remain focused on their plan even when an inevitable market correction comes.

The problem of fretful investors making rash decisions during big swings in the market isn't unique to robo-advisers. Selling your portfolio out of fear when markets turn ugly and keeping your investments in cash may mean missing the opportunity of a turnaround, as was the recent case with Brexit.

But robo-advisers have gained popularity in recent years during a period of relative strength on the stock markets, in part by marketing toward younger clients who may not have the scars of bear markets of the past to remind them they're a natural part of the market cycle.

For many millennials, robo-advisers are appealing because they're advertised as offering professionally managed portfolio advice at a relatively low cost. Such digital investment services ask a series of questions to determine one's savings goal and risk tolerance before creating a portfolio using an appropriate mix of low-cost equity and bond exchange-traded funds (ETFs).

At Wealthsimple, Dave Nugent says the company starts first-time investors off in more conservative portfolios even if it might not be the right long-term asset mix.

"It's much more important to get the first six months to a year right for a first-time investor and let them ease and dip their toe into the market," said Nugent, Wealthsimple's head of investments.

Nugent says its about educating clients about the risks of investing so that when the bad news comes, it doesn't scare them off.

"If they sell within the first six months because the market goes down, it doesn't matter whether their goal was one year or 10 years from now, they're never coming back to investing," he said.

Chris Nicola, co-founder of WealthBar, says his company regularly communicates through its website, emails and hosts webinar sessions to help further client confidence and build trust.

WealthBar also uses a wide range of investment classes to help reduce volatility for investors.

"Robo-advisers haven't been around very long, but the strategies that go into portfolio management and asset allocation aren't new," Nicola said.

Nugent notes that Wealthsimple has full-time registered portfolio managers available for clients to talk to on the phone, over email or video chat.

He says the company is also able to use its technology to identify and respond to investor concerns.

If a nervous client is constantly logging into their account on a day when markets are tanking, Nugent says Wealthsimple can contact them even if they haven't reached out to the company.

"We can use the data we collect on our clients to actually provide a personalized experience to what they're feeling emotionally," he said.

But Matthew Lekushoff, a traditional financial adviser with Raymond James Ltd., says the personal interaction he offers can give him an edge.

"There's a lot of trust there with my clients where they know that I've been doing this for over 20 years, I've seen a lot of different cycles, and we weather the storms very well," he said.

"I've got the ability to pick up the phone and walk them through what has happened in the past, what may happen in the future and how our approach will be better than selling everything off."

Lekushoff compared using a traditional financial adviser to using a personal trainer.

"You tell me what your goals are, like a personal trainer, and I'm going to try to get you from where you are to where you want to be," he said.

But Nicola says that kind of personal attention is unlikely for investors with small portfolios that are less lucrative to financial advisers.

"As advisers have continued to move upmarket, fewer and fewer people are getting that kind of relationship or advice," he said.

Craig Wong, The Canadian Press