Guide to Online Investment Advisors

Some Canadian registered portfolio managers and restricted portfolio managers (PMs) have recently begun operating as “online advisors”. These firms are often referred to as “robo-advisors”, and they offer professional money management services to investors by using an interactive website, instead of through the more traditional model of face-to-face interaction.

Despite its frequent use in the media, the term “robo-advisor” can be misleading. “Robo-advisor” conjures up an image of a fully automated computer system that generates and delivers advice to investors. While that is how some firms may operate in the United States, operations differ in Ontario. A more accurate term would be “online investment advisor”. That is because a registered advising representative (AR) will be involved in – and be responsible for – the investment decisions that are made for investors, even though communication will not normally involve the face-to-face meetings and regular personalized contacts that are typical of a traditional portfolio management model of providing advice. In Ontario, the rules of operating are the same between an advisor working in the traditional model of interacting with clients face-to-face and an advisor that provides advice using an online platform. Both have the same registration and conduct requirements.

How does this online advice model work? What does the AR do?

The online advice model available to Ontario investors provides discretionary portfolio management services. This means the online advisor makes investment decisions on your behalf without your specific approval for each trade. And it’s not robotic: it’s a hybrid model where an AR provides investment advice through an online platform.

Through an interactive website, a series of questions are used to gather crucial information about a client, referred to in the industry as Know Your Client (KYC). This information is meant to confirm the identity of a potential client as well as give the AR a good understanding of an individual’s investment needs and objectives. The AR is also responsible for establishing whether there is enough information about the investor to determine the types of investments that are right for them and provide advice that is suitable to their investment objectives and personal financial situation.

The AR must remain actively involved in the decision making process with the client. While an interactive website may be used to collect the KYC information, an AR is required to review the information to ensure that it is sufficient. This is especially the case when the AR notices inconsistencies in the way an investor has answered questions. Also, investors can always initiate contact with an AR. The options for how an investor and an AR communicate are typically by telephone calls, emails, online messaging or video chats (and less often through in-person meetings).

While some online investment advisors may develop a tailored asset mix and investment portfolio for each client, in most cases, using an algorithm, the firm’s software is used to make a first determination of the client’s investor profile and then select one of a set of standard model portfolios. Before the client’s money is invested, an AR must review and, if necessary, adjust the investor profile and selected portfolio to ensure that the model portfolio that has been proposed for the client is in fact suitable for them. Going forward, the client’s portfolio will also need to be monitored to ensure that the investments continue to be consistent with the model portfolio that was approved for the client.

To date, online investment advisors’ client portfolios have consisted of ETFs, low-cost mutual funds or other redeemable investment funds, or cash and cash equivalents. There is no use of complex products such as leveraged strategies or short selling.

One of the biggest draws to using an online investment advisor is the lower fees. By using an interactive website and electronic communications to gather information, and by using model portfolios, online investment advisors will have lower operating costs per client than most traditional portfolio managers.

Comparison to traditional advisors

To better grasp how an online investment advisor works, it’s worth understanding how two other common investment models – full-service firms and discount brokers – generally conduct business.

In traditional full-service investment firms, there are two distinct levels of interaction. In the first, a registered financial advisor helps an investor make investment decisions by providing suitable investment recommendations. These must be approved by the investor before a transaction can be made. The second model entrusts the registered financial advisor with discretionary portfolio management authority, where they make suitable investment decisions on behalf of a client, without their approval for each trade.

As an alternative to the full-service model, investors may choose the do-it-yourself (DIY) option where they forego the assistance and advice of a registered financial advisor and make investment decisions on their own, commonly referred to as discount brokerages. Discount brokerages typically operate using an online platform. Using a registered discount brokerage platform, investors typically pay lower commissions and fees since they don’t get advice about the suitability of the investments they choose to make for themselves. Information may be available on a discount brokers website to help clients with financial planning and asset allocation.

Points to keep in mind

With online investment advisors, investors now have a new option to consider when looking to invest. Carefully think about whether the services provided by online investment advisors can meet your investment needs, particularly if you are comfortable with online interactions but not with investing completely on your own.

If you’re interested in using an online investment advisor, here are some things to consider:

  • Do you have secure internet access from your home or office or through a personal mobile device? Are you comfortable using the internet to purchase products and services? You should only access your investment account from a safe and secure location and device.
  • Determine what you want from your investment provider: Do you prefer regular in-person discussions of financial goals and objectives? Is it sufficient to focus on portfolio building at a comparatively lower cost, or do you also want help with financial, tax or estate planning?
  • As your wealth accumulates, think about whether you want more complex services and diverse investment products than what can be provided by online advisors.
  • Since online advisors have discretion to make investment decisions on your behalf without your specific and informed consent for each trade, be sure you are comfortable with this type of service.
  • Make sure that you are dealing with a registered firm that is in good standing before you disclose your personal and financial information. Visit www.checkbeforeyouinvest.ca as a first step to protect yourself.
  • Read and understand the terms and conditions for receiving advice and purchasing investments. Know what fees and expenses you can be charged.
  • Ask whether there are any potential conflicts of interest with respect to their offerings or the fees they charge.
  • Ensure that you complete the online questions carefully and accurately, and that your answers reflect your circumstances and risk tolerance, including the financial and emotional aspects of potential losses in the event of a market downturn.

Resources

A version of this article originally appeared in the September 29, 2015 issue of Investor News.

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