Guide to online investment advisers

Despite its frequent use in the media, the termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition “robo-advisorRobo-advisor A business that offers professional money management services to investors over the internet. See also, Online Investment Advisor.+ read full definition” 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 operate in the United States, requirements are different in Ontario. Here, a more accurate term would be “online investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition adviser”. That is because an individual 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 traditional portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition management.

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

The online advice model available to Ontario investors provides discretionary portfolio management. This means the online adviser makes investment decisions on your behalf without your specific approval for each tradeTrade The process where one person or party buys an investment from another.+ read full definition. And it’s not robotic: it’s a hybrid model where a human adviser uses online tools for efficiency but is required to meet all regulatory standards.

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)Know your client (KYC) Advisors are required to gather personal and financial information about you and your investment experience. This is the Know Your Client (KYC) information. This includes details about your investment objectives and goals, your income and net worth, your investment experience, your time horizon (how soon you’d like to reach your goal or how long you’re…+ read full definition. This information is meant to confirm the identity of a potential client as well as give the adviser a good understanding of an individual’s investment style and needs. This includes determining things like the investor’s goals, risk tolerance, and level of desired liquidityLiquidity Refers to how easy it is to change an investment or asset into cash, without affecting the price. Liquid assets include most stocks, money market instruments and government bonds. Your home or other property is not very liquid.+ read full definition (the ability to convert an assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition to cash). The online investment adviser is responsible for establishing whether there is enough information about the investor to allow for suitable recommendations or choices to be made for that investor.

The online investment adviser typically also gets in contact with the client prior to completing this information-gathering process. This is especially the case when the registered financial adviser notices inconsistencies in the way an investor has answered questions. Also, investors can always initiate contact with their adviser. The optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition for how an investor and the adviser communicate are typically by telephone calls, emails, online messaging or video chats (and less often through in-person meetings).

While some online investment advisers may develop a tailored asset mixAsset mix The percentage distribution of assets in a portfolio among the three major asset classes: cash and cash equivalents, fixed income and equities.+ read full definition and investment portfolio for each client, in most cases, 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 adviser must review and, if necessary, adjust the investor profile and selected portfolio to ensure that it accurately reflects the needs and risk tolerance of the client. From time to time, the client’s portfolio will also need to be rebalanced to maintain the asset mix that has been targeted.

The online investment advisers operating in Ontario today are not using complex products for their clients’ investments. Typically they use model portfolios consisting of a number of unleveraged exchange-traded funds (ETFs), low cost mutual funds or other redeemable investment funds, or cash and cash equivalents.

One of the biggest draws to using an online investment adviser is the lower fees. By using an interactive website and electronic communications to gather information, and by using standardized model portfolios, online investment advisers will have lower operating costs per client than most traditional portfolio managers. This allows them to accept clients with small minimum accounts and charge lower fees. However, clients of online investment advisers should not necessarily expect to experience as much direct, personalized contact as they would receive from a traditional investment adviser.

Comparison to traditional advisers

To better grasp how an online investment adviser works, it’s worth understanding how two other common investment advisors – full-service firms and discountDiscount When something sells for less than its normal price.+ read full definition brokers – conduct business.

Traditional full-service investment firms

Many investors choose to work with a financial adviser who is registered to represent a full-service investment dealerInvestment dealer A securities firm that buys and sells a wide range of investments. They are likely a member of the Investment Industry Regulatory Organization of Canada (IIROC).+ read full definition or a portfolio management firm. The adviser will typically meet with his or her clients in person to set investment goals (which are revisited on an annual basis), create an investment plan, design a portfolio that contains suitable investments, track progress, and make changes to investment products and strategies as required. The adviser can answer questions about investment products and can help investors keep on track to meet their goals. Investors may directly pay fees and/or commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition for the investment advice they receive and products they investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in. Ongoing fees, like those used to pay “trailing commissions” to advisers, may also be charged to investors.

There are two key ways investment advice is provided to investors by advisors at a traditional full-service investment firm:

1. Recommended to you: The adviser helps an investor make investment decisions by providing suitable investment recommendations. These must be approved by the investor before a transactionTransaction The process where one person or party buys goods or services from another for money. Examples include taking money out of an account, buying something with a credit card or taking out a loan.+ read full definition can be made. This is typically the way investment advice is provided by investment dealers, who offer a wide range of securities. As well as being registered with the OSCOSC See Ontario Securities Commission.+ read full definition, they will be members of the Investment Industry Regulatory Organization of Canada (IIROC)Investment Industry Regulatory Organization of Canada (IIROC) National self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.+ read full definition.
2. Decided for you: The adviser makes suitable investments on behalf of the client, buying and selling investments for the client without their specific approval for each trade. This is referred to as discretionary portfolio management, and may only be provided by registered portfolio managers and by certain registered investment dealers who are specifically approved to operate in this way by IIROC. The online advice model available to Ontario investors provides this type of advice.

Discount brokers

There is also a do-it-yourself (DIY) option: Investors who consider themselves DIY investors may choose to forego the assistance of an investment dealer or adviser. They can purchase investments and make trades through a registered discount brokerDiscount broker A stockbroker who charges lower fees to buy and sell investments, as opposed to a full-service broker. Does not provide investment advice.+ read full definition that is a member of IIROC. Discount brokerages operate using online platforms. Investors typically pay lower commissions and fees because they don’t get advice about the suitability of the investments they choose to make for themselves. However, discount brokers may provide information on their websites to help clients better understand different types of investments and automated investment tools to help with financial planning or asset allocation.

Points to keep in mind

With online investment advisers, investors now have a new option to consider when looking to invest. Carefully think about whether the services provided by online investment advisers 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 adviser, 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 accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition 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, taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition or estate planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals may include leaving the most money possible to your loved ones, with the least amount of taxes. Other goals may include caring for children, paying off debt or passing on a business.+ read full definition?
• As your wealth accumulates, think about whether you will want more complex services and diverse investment products than what can be provided by online advisers.
• Since online advisers 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.
• Check before you invest. Make sure that you are dealing with a registered firm that is in good standing before you disclose your personal and financial information.
• Do your due diligence: Find out the qualifications and experience of the people operating an online investment adviser.
• 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.
• Find out where and how the investments managed by your online adviser will be held. It is safer if your assets are held for you at a firm that is a member of IIROC or at a financial institution rather than being held for you by the online adviser.
• 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.
• Know how to provide updates on your circumstances if they change, such as your investment time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition, financial or tax situation, or financial goals – and don’t delay providing those updates.

Key point

With online investment advisers, a registered financial adviser will be involved in – and be responsible for – the investment decisions that are made for investors.