The big Canadian banks have been forced to pour gigantic investments into their technology infrastructure in the back half of this decade. After the Great Recession, the rise of financial technology companies had some analysts predicting that banks could face a serious challenge from these boutique firms. Canada’s top banks boast enormous war chests, and they have moved quickly to eliminate the advantages some of these firms had in the mobile and online space.
In late 2018, I’d discussed why a bet on the blockchain development at Canadian banks was a better option than Bitcoin. Recent reports indicate that blockchain is a long way away from revolutionizing banking transactions. However, there is another hot tech investment that banks have jumped into: artificial intelligence.
How Canada’s top bank is betting on AI
Royal Bank (TSX: RY)(NYSE: RY) is the largest financial institution in Canada. Shares have climbed 20.4% in 2019 as of close on November 7. Advisory services at top Canadian banks are evolving. Millennials have shown a propensity to do most of their banking online, which is changing the way banks approach financial advice. Prepare for the rise of the robo-advisor.
A robo-advisor provides financial advice or investment management online with moderate to minimal human intervention. This advice is crafted for clients based on mathematical rules or algorithms. Bank of Montreal was the first of the Big Five Canadian banks to offer a digital portfolio management service. BMO SmartFolio launched in January 2016. SmartFolio differs from services in the U.S. and U.K. in that portfolios are monitored and managed by a portfolio management group rather than a pure computer algorithm.
Royal Bank launched its own low-fee robo-advisory service in late 2018. Portfolios generated on the RBC InvestEase platform invest in index exchange-traded funds (ETFs) developed by RBC Global Asset Management. It carries a management fee of 0.5% on investment balances of at least $1,000.
This past summer, Royal Bank threw some cold water on the robo-advisory trend. “We have built InvestEase and it looks and acts like the best robos out there,” RBC wealth management head Doug Guzman said in August. “We haven’t seen Canadians run to it.” It is early days, and RBC does not disclose how much InvestEase currently oversees.
The Fintech Advisory Service Report by Strategic Insight recently stated that Canadian robo-advisors had $4.1 billion in assets under management as at December 2018. Growth at Wealthsimple alone in the first half of 2019 has pushed this number above $5 billion. It is a tough spot for RBC and the other top banks, as the promotion of the robo-advisory service risks cannibalizing its other wealth management offerings. However, its growth over the last decade is undeniable. Expect more investment from Royal Bank and its peers in these services as we move into the 2020s.
