What is an online investment adviser?

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 operate in the United States, requirements are different in Ontario. Here, a more accurate term would be online investment adviser. That is because an individual will be involved in – and be responsible for – the investment decisions that are made for investors. This is true even though communication will not normally involve the face-to-face meetings and regular personalized contacts that are typical of traditional portfolio management.

How much does an online investment adviser cost?

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 may not experience as much direct, personalized contact as they would receive from a traditional investment adviser.

How does online investment advice work?

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 trade. 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). 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 liquidity (the ability to convert an asset 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 answered questions.

Also, investors can always initiate contact with their adviser.

Communicating with your online investment adviser

The options 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).

Some online investment advisers may develop a tailored asset mix and investment portfolio for each client. But 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.

Typically online investment advisers operating in Ontario 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.

How do online investment advisers compare 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 discount 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 dealer 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 commissions for the investment advice they receive and products they invest in. Ongoing fees may also be charged to investors.

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

1. Recommended to you: The adviser helps you make investment decisions by providing suitable investment recommendations. These must be approved by you before a transaction 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 OSC, they will be members of the Canadian Investment Regulatory Organization (CIRO).
2. Decided for you: The adviser makes suitable investments on your behalf, buying and selling investments for you without your specific approval for each trade. This is called discretionary portfolio management, and it may only be provided by registered portfolio managers and by certain registered investment dealers who are specifically approved to operate in this way by CIRO. The online advice model available to Ontario investors provides this type of advice.

Discount brokers

People who consider themselves do-it-yourself (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 broker that is a member of CIRO.

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.

The Canadian Investment Regulatory Organization (CIRO) consolidates the operations of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). CIRO is a self-regulatory organization that oversees all investment dealers, mutual fund dealers and trading activity on Canada’s debt and equity marketplaces.

What else should you consider if you plan to use an online investment adviser?

It’s useful to think carefully about whether the services provided by online investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition advisers can meet your investment needs. This is particularly important 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…+ 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 portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and…+ read full definition 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…+ read full definition or estate planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals…+ 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 tradeTrade The process where one person or party buys an investment from another.+ read full definition, 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 CIRO 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.…+ read full definition, financial or tax situation, or financial goals – and don’t delay providing those updates.

Anyone selling securities or offering investment advice must be registered with a securities regulatorSecurities regulator A government agency that enforces the securities act in jurisdiction it has authority over. This…+ read full definition, unless they have an exemption. Check registrationRegistration A requirement for any person or company trading investments or providing advice in Canada. Securities…+ read full definition through the Ontario Securities Commission or Canadian Securities Administrators.

You can also check the Canadian Securities Administrators (CSA)Canadian Securities Administrators (CSA) The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s provincial and territorial securities…+ read full definition disciplined persons list to see if an advisor has been disciplined by their provincial securities regulator.