On-line advisers are often called portfolio managers, robo-advisers or automated advisers. They are websites that offer investment advice. You can generally authorize them to carry out transactions on your behalf.
1. How do on-line advisers operate?
To begin with, you fill out questionnaires to determine your investor profile, your objectives and your risk tolerance. In most cases, a software program will determine your investor profile and your investment portfolio composition.
An on-line adviser is a firm that offers investment advice via an interactive website.
The media often use the term “robo-adviser”. The term might give the impression that any advice given is fully automated. This is not so in Québec or the rest of Canada. In these jurisdictions, an on-line adviser retains its legal obligations, whether on-line or in person. In particular, it is required to pursue its activities by way of a natural person, known as an advising representative. As well, it must ensure that the investor profile that has been generated on your behalf is suitable and consistent with your answers to the questionnaires. For instance, the advising representative must ensure that a conservative investor does not invest in a portfolio that is too risky.
2. Do you have to sign a discretionary management mandate?
You may give authority to the advising representative to carry out transactions on your behalf without your prior consent. This can be done by signing a discretionary management mandate, also known as a “managed account”.
However, the advising representative must rigorously respect your investor profile and investment objectives.
This type of discretionary mandate is also used by advising representatives who meet with clients in person.
3. What are the responsibilities of on-line advisers?
All advisers, regardless of whether they carry on their activities on-line or in person, must gather enough information to learn as much about you as possible and recommend investments that suit your needs and objectives.
An advising representative must regularly update your personal information to ensure that your investments continue to match your profile and objectives. This is particularly important in the event of life changes.
4. What type of securities is your money invested in?
Some advising representatives customize investment portfolios based on each client's profile and objectives. However, in most cases, an on-line adviser will recommend instead an investment portfolio among pre-established model portfolios.
Recommended investments are often limited to a few exchange-traded funds (ETFs) or mutual funds for which the management fees are lower than for other types of investments.
As necessary, a client's portfolio is rebalanced to maintain the asset allocation previously determined. Fees may be charged for these operations.
5. What are the fees for using this type of service?
A number of fees can be charged that can all add up:
- Management fees of the on-line adviser
The on-line adviser's website might indicate annual management fees of 0.5%. However, be careful and don't be afraid to ask questions.
For example: Is there a minimum annual fee, regardless of the amount invested? If you invest $25,000 and minimum management fees amount to $250 per year, you'll pay 1% in fees per year, and not 0.5%.
- Securities management fees
On-line advisers generally invest the money received from clients in exchange-traded funds. These funds charge annual management fees that vary from 0.05% to 0.5%. However, don't forget to ask about the type of securities in which your money will be invested and the applicable fees.
- Transaction fees
Some on-line advisers charge fees for each transaction carried out in your account. Others might include them as part of the securities management fees. Ask any questions you might have to fully understand the transaction fees.
- Administrative expenses
On-line advisers might charge these expenses, for example, in the case of an RRSP account. Again, don't hesitate to ask questions about these expenses and whether they have an impact on your returns (in French only).
6. What is different when dealing with an on-line adviser?
When dealing with an on-line adviser, you generally never meet the adviser in person. If markets tank and you're concerned about your investments, you won't be able to meet with a professional for reassurance and assistance in making a decision on the matter.
However, you can always contact an advising representative through different communications channels, including telephone, e-mail, on-line messages, webcam etc.
7. How can you check whether a firm is authorized to sell its product offerings?
Consult the Register of firms and individuals authorized to practise or call the AMF Information Centre at 1-877-525-0337.
Here are some tips before you hand over your savings to an on-line adviser:
- Make sure you have secure Internet access, especially in public areas.
- Be comfortable with the on-line procedure.
- Check how much authority has been assigned to your on-line adviser.
- Give honest answers when filling out the questionnaires to ensure that your investor profile reflects your risk tolerance in the event of strong stock market volatility.
- Take into account how easy it is to use the interactive website, the expertise of the portfolio managers, the manner in which the funds are invested, the suitability of the recommended asset allocation and the fees being charged.