While Bank of Montreal (TSX:BMO)(NYSE:BMO) has yet to confirm specifically, industry insiders have confirmed that BMO will be launching a robo-advisory service later this year, becoming the first of the big Canadian banks to do so.
Robo-advisors are a service that selects ETFs for investors based on their risk tolerance, and then automatically rebalances the portfolio over time. Until now, the rapidly growing Canadian robo-advisory space has been dominated a small group of branchless start-ups.
BMO is changing this, which is important. The bank is uniquely positioned to start a robo-advisor service, and the launch represents a move to protect and expand its market share from the ever-growing threat of new “FinTech” competitors. While BMO customers are set to gain, the real winners from the move may be BMO shareholders.
BMO specializes in wealth management
Every Canadian bank has areas of specialty, and BMO’s is wealth management. The company currently has the largest wealth management segment of the big banks, representing 22% of revenues. This compares to around 12% for its competitors.
In addition, BMO’s wealth management segment has been their fastest-growing segment over the past five years, and was the recipient of the Best Wealth Management in Canada award from Global Banking and Finance Review.
This is important because by launching a robo-advisor segment, BMO is leveraging its current advantages. The company already has a large and high-quality wealth segment, and this provides BMO with a large client base and extensive distribution network, which will help ensure the service is a success.
In addition, BMO already has some experience with robo-advising, and the company’s Advice Direct platform—while not a full robo-advisor service—was the first in the country to provide personalized online advice on portfolio management through software.
BMO is also Canada’s third-most dominant ETF company, with 63 ETF products—the most of the big banks. A robo-advisor service will provide BMO with a new means to distribute its high-quality selection of ETFs.
The robo-advisor service will also help BMO protect and grow market share
Canada currently has several new robo-advisor services from companies like Wealthsimple, NestWealth.com, and Questrade. These services represent a risk to bank profits, since they are extremely low cost, user friendly, and completely digital. This is particularly appealing to millennials, who prefer digital and convenient formats, but also want personalized and affordable advice.
A recent report by McKinsey found that 60% of bank profits are at risk from new FinTech players. This is because about 60% of global bank profits do not come from the lending out of current deposits, but rather from the origination and sales of new loans and accounts, as well as on-going fee revenue from wealth management.
It is these profits that are at risk from FinTech players. As bank customers choose lower costs and more user friendly services like Wealthsimple, for example, banks lose access to their customers and, as a result, lose the valuable cross-selling opportunities that drive 60% of profits.
Wealth management revenues comprise a large portion of the at-risk profits, and these revenues are important to protect since they comprise more stable fee-based revenue (as opposed to interest revenue the banks get from taking deposits and making loans).
In addition, the wealth management business is typically more profitable and has a higher return on equity than traditional banking, since wealth management has lower capital requirements and costs are also lower.
With BMO’s robo-advisor service, it can now provide its customers with an alternative to using a competitor, while maintaining the convenience of keeping their finances all at one institution.
If BMO can compete on price and provide an excellent customer experience, it can leverage its current wealth management strengths and the advantages of being a diversified financial institution to not only fend off the threat from new competitors, but to also grow market share.
