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More robo-advisors want regulatory approval to sell without contacting clients

By Rudy Luukko |
Source: Morningstar Canada

With the emergence of robo-advisors in Canada over the past several years, it's technologically feasible to open an account and be fully invested without any human contact. But with one exception, regulators require online advisory firms to have a registered individual make personal contact with clients, usually by phone.

The closest thing to pure robo-advice in Canada, a "no-call" model that some other online advisors will seek to emulate, resides at Toronto-based Questrade Wealth Management Inc.

Through the firm's Portfolio IQ, a discretionary asset-management service, investors are brought on board as new clients with a series of faceless, voice-less interactions. For more than 90% of clients, says Questrade president Edward Kholodenko, a managed portfolio of exchange-traded funds can be acquired without any personal contact with an individual advisor.

There are no smiles, no handshakes and no small talk with Portfolio IQ, which made its debut in November 2014. What online investors do get is what to them matters most: an efficient and user-friendly process of account opening, risk assessment and portfolio selection. "We want to simulate online the interaction between an advisor and a client," says Questrade portfolio manager Jason Casey.

That it does on asset allocation, though not complex financial-planning scenarios. What the Portfolio IQ questionnaire does best is address is the important issue of how much risk an individual investor can afford to tolerate given their personal circumstances, and how much risk they are willing to assume.

With the help of a 30-something novice investor who is a self-employed, married mother of two, Questrade demonstrated how its risk-assessment process works. As is common in questions to determine suitability, conflicts can occur in responses to different scenarios. That's exactly what happened in the demonstration.

In reply to one question, the investor said she has a low to medium risk tolerance and would be willing to tolerate a loss of 8% in a one-year period. But in an earlier question she had said she'd be OK with a one-year loss of 10-15%. Portfolio IQ flagged the conflict immediately, prompting the investor to reconsider her answers.

Later in the suitability assessment, the questionnaire asked the investor what she'd do if her portfolio lost 10% in a single month. The four potential responses ranged from switching to cash, to investing more. The volunteer investor chose the stay-the-course option, which included the words: "It's all good."

According to a 2016 mystery-shopper survey conducted in Canada by DALBAR, a research and consulting firm, Questrade Portfolio IQ was rated as having the clearest questionnaire experience of Canadian robo-advisor firms. The service also won praise for its "relatively detailed" risk assessment, which relies on a combination of text-based descriptions and visual depictions of risk, using bar charts and line graphs.

Once a client has opened a Portfolio IQ account and is fully invested, they'll be required to verify their investment objectives and risk tolerance at least annually. If they ignore the online requests to do so, they'll receive a phone call from a Questrade portfolio manager. Also, says Casey, the regulators require phone calls to be made to all clients who are 65 or older.

Along with satisfying regulators that its online risk-assessment process is sufficiently robust, Questrade also agreed to restrictions on what investments it is allowed to offer. Other than cash or cash equivalents, Portfolio IQ holdings must consist of ETFs or other investment funds that meet the definition of "mutual fund" under securities legislation. Furthermore, funds that are classified as commodity pools or that engage in short-selling or leveraging are also off-limits.

These constraints are no hindrance to Questrade, whose funds held in Portfolio IQ consist entirely of Canadian or U.S.-listed ETFs. There are five basic portfolios, and three tiers of each one depending on the size of the investor's account. Small accounts may hold as few as three ETFs, and accounts in the top tier, with more than $50,000 in assets, may have about 20 ETF holdings.

Read: A new creature: the "hybrid" advisor

Elsewhere among robo-advisors, Nest Wealth Asset Management Inc.'s founder and CEO Randy Cass says his firm is "constantly in discussion" with the regulators on the subject of a no-call model. "We're incredibly supportive of a no-call model," Cass told Morningstar, adding that he understands that regulators need assurances that investors will be protected.

As all robo-advisors would agree, the no-call model can't apply to everyone. Cass says clients should always be allowed to make a call to the online advisor, even if they didn't need a call to open an account and begin investing.

Secondly, a robo-advisor's no-call model must have a methodology in place to identify people who need clarification of their risk-return profile and objectives before placing them into a portfolio.

Thirdly, says Cass, the no-call model needs to be able to identify "higher-risk" investors who, because of limited investment knowledge or other reasons flagged during the online risk assessment, should receive a call from a portfolio manager before being placed in a portfolio.

A sticking point for Cass, a member of the OSC's fintech advisory committee, is the restrictions on investment strategies that regulators have insisted on for approving no-call models. Though Nest Wealth's current portfolio strategies would not be an impediment to obtaining no-call status, Cass envisages a future where there would be a wider range of permitted investments to meet client needs. So he is unwilling at this time to settle for no-call restrictions along the lines of what Questrade has accepted.

Citing his own clientele, Cass says robo-advice services aren't only for millennials that have simple investment needs and small accounts. On average, Cass says Nest Wealth clients are in their mid-40s, and the firm's average account size is in the low six figures.

For its part, Vancouver-based online advisor WealthBar Financial Services Inc. takes a more personal approach, assigning clients to a dedicated financial advisor. "We've always made the financial planning a big part of the experience for clients," says WealthBar co-founder and chief technology officer Chris Nicola.

WealthBar, which requires a minimum account size of $5,000, doesn't necessarily conduct its conversations with clients via phone calls. With the blessing of the B.C. Securities Commission, these conversations can take place via online chats.

As for the no-call model pioneered by Questrade, Nicola says WealthBar is keeping an eye on where securities regulations are going but isn't about to alter its business model. "We support the no-call model for online investing, to try to give consumers more choice and more opportunities," he says, adding that WealthBar is not currently involved in seeking to change the rules.

As previously reported, Toronto-based Wealthsimple Inc. is seeking relief from mandatory client calls, and the Ontario Securities Commission has imposed conditions on its registration. The firm has been ordered to hire a consultant to create an OSC-approved plan to strengthen its compliance system.

Read: Wealthsimple seeks relief from mandatory client calls

The OSC's conditions call for the consultant to submit a letter to the OSC verifying that the consultant's recommendations have been implemented, tested and working effectively. The terms and conditions imposed on Wealthsimple's registration "shall remain in place until they are approved by (OSC) staff following the approval of the consultant's attestation letter."

Though some of the registration conditions imposed in October of last year appear to be disciplinary in nature, this could not be confirmed by Morningstar. Neither the OSC nor Wealthsimple will comment on whether the OSC has concerns that Wealthsimple hasn't complied with the existing requirement that all investors be contacted by a portfolio manager.