In what may be a glimpse of the future for financial advisors, regulators have given the go-ahead for one firm to offer a form of automated financial advice.

Bank of Montreal‘s discount brokerage business, BMO InvestorLine Inc., has received exemptions from the Investment Industry Regulatory Organization of Canada (IIROC) and the Ontario Securities Commission (OSC) that will allow BMO InvestorLine to offer a new, fee-based account that provides computer-generated equities and mutual fund recommendations.

BMO has declined to comment on when it plans to roll out the service, or to provide any further details. Nevertheless, the regulators’ orders outline what BMO has in mind – which is, essentially, automated advice.

The regulatory exemptions are necessary because traditional advisor tasks, such as collecting “know your client” information and assessing suitability, will be performed primarily by computer, with advisors serving in a support role.

According to the exemption orders, the proposed service, which is branded as adviceDirect, will allow clients to provide their KYC information to slot themselves into one of four investor profiles (income, balanced, growth and aggressive growth), and then provide them with trading recommendations on equities and mutual funds based on a computerized analysis of their portfolios against their chosen profiles.

Advisors aren’t cut out of the process entirely. Each client would be assigned to a team of reps. The team would contact each client to discuss the KYC information before a new account is approved, and the team would make its own recommendation regarding which investor profile is appropriate. Once an account is approved, the team also will have a role in ongoing account supervision, monitoring client portfolios and trading activity, providing annual reviews, and carrying out suitability assessments when required.

The question is: will it work? The possibility of automating financial advice has been kicked around for years – since at least the first dot-com boom.

However, automation’s promise has yet to be realized. Although the prospect of being able to provide ultra-cheap advice by replacing flesh-and-blood advisors with machines is certainly appealing to firms, the idea faces technical, regulatory and strategic hurdles.

For one, programming all of the possible variables is easier said than done. Second, regulators are naturally wary of novel, untested approaches. And the firms themselves may be afraid of cannibalizing clients from their own sales forces and possibly alienating advisors in the process.

Dan Hallett, vice president and director of asset management with Oakville, Ont.-based HighView Financial Group, recalls being involved in the 1990s with a project to program portfolio advice. He says the project was ultimately abandoned after many attempts: “We just found the many client-specific inputs too complex to automate the process fully.”

These days, automating such things may be more feasible from a technical standpoint. Yet, BMO’s initiative does not attempt to automate financial advice fully; BMO’s process preserves enough of a human role that regulators are willing to give it a chance. Indeed, it appears that both IIROC and the OSC are treating this as a bit of an experiment.

IIROC’s order indicates that the regulator’s board had contemplated denying BMO’s request for an exemption. Instead, IIROC may pursue rule changes to allow the sort of service BMO is proposing.

However, IIROC has decided that it would be difficult to amend the rules without understanding how the service will work, the issues that may arise and whether there is any demand for this sort of service or not. So, for now, IIROC has decided to grant the exemption, and rule amendments may follow if necessary.

The OSC also has granted its exemption with conditions, including that BMO report to the regulator – six months after the service launches, and again after a year – outlining any issues BMO encounters, including: suitability complaints; systems failures; and any disagreements that arise between prospective clients and reps over the proper investor profile that results in account approval being denied.

The OSC also may seek more information from BMO during joint compliance reviews with IIROC and other securities commissions.

As for the possible strategic obstacles to automated advice, Hallett says, “I think this is most threatening to the marginal advisor.”

This includes those advisors who are just offering basic investment advice and not high-quality service, such as robust client profiling, proper investment policy statements, disciplined portfolio construction and clear reporting. The advisors that are most at risk, Hallett suggests, are those who haven’t built these sorts of things into their practices.

The question of whether there will be a demand for automated advice probably will have to be answered by experience. Pricing will surely play a big part; however, BMO refuses to provide any details of its fee schedule. IE

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