A few months into the launch of Bank of Montreal’s (BMO) automated online advisor, the new service is “going well” and BMO’s call centre is “not overwhelmed with enquiries” from users, said Michael Holder, senior counsel with BMO, at the Strategy Institute’s conference on registrant regulation in Toronto on Wednesday.
BMO’s service, SmartFolio, is being marketed — including on buses and subways — as a low-cost way for clients to access the investing guidance available from a portfolio manager. Account opening is fully automated and clients can choose from one of five model portfolios made up of BMO funds. The minimum investment is $5,000. Personal advice is available by telephone, email and live chat. However, Holder noted that the automated sections of the system, including a special feature designed to answer common questions, have so far been able to answer most client enquiries.
Holder pointed out that SmartFolio is not a “robo-advisor,” as it has often been described. Instead, he suggested that it would be more appropriate to use a different term, such as “cyborgs” for online advice services. That’s because Canadian regulators have stipulated that these services must be backed by personal advice for some functions, such as reviewing suitability, and are unlike the fully automated “robo-advisors” available in the U.S.
U.S. regulators have expressed some concerns with these types of investing models and are considering whether to establish some type of new regulatory oversight for them, Holder said.
Nevertheless, he also pointed out that the market for these services in the U.S. is growing rapidly, with proportional growth to be expected in Canada. First introduced in the U.S. in 2008, it is estimated that approximately 5.5% of all investment assets in the U.S. will be managed through robo-advisors by 2020.
BMO also offers other online investing models with greater interpersonal components. The online advice model, for instance, offers additional advisor support, with ongoing guidance and support by the human advisor. It includes daily alerts and, if appropriate, advice that the portfolio has become unbalanced, with recommendations for changes. “But this is still a self-directed process,” Holder notes.
Although regulators in Canada have stated that there is no exemption from the normal conditions of registration for online portfolio managers, Holder noted that new applicants for online systems can expect to provide more detail about know-your-client (KYC) questionnaires, investor profiles and model portfolios. “You are going to have to open up the hood a little bit more as to how your automated service works,” Holder noted.
In particular, KYC forms and suitability determinations may have to be revised to reflect the lack of human interaction when they are filled out, Holder noted.
“A lot of thought needs to go into having a series of questions that are behaviour-based, and which are going to pull out that information so you can understand risk profiles,” he said.
For instance, clients should be asked specific questions, such as whether they could tolerate losing 10% of their portfolios. Such online systems should also prevent applicants from skipping questions and, importantly, flag inconsistencies, he said.
Finally, online investors should always be aware that a registered advisor is available should they need further guidance, Holder noted: “The key guidance is that a human being has to be involved.”
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