Canada’s regulators have made their position clear: robo-advisors are just as much flesh and blood as they are algorithms and web servers.

The Canadian Securities Administrators (CSA) released a guidance notice in September in response to the increased interest in financial advice provided through online platforms. The notice outlines that these fledgling online investment advice models, which first started springing up in the Canadian financial services sector about a year ago, must follow the same requirements as for any portfolio manager as set out in National Instrument 31-103.

Clearly aligning these new financial advice models with more traditional financial advice firms can only be a benefit for robo-advisors, says Randy Cass, CEO and founder of Toronto-based Nest Wealth Asset Management Inc.

“This [online] industry is building credibility and reputation right now,” Cass says, “and everything that we can do to reassure clients and potential clients that they have the benefits of reduced costs and embedded technology while still having the same level of compliance and scrutiny of alternatives is fantastic.”

A common element of both the online advice platforms and their bricks-and-mortar competitors is the need for registered representatives. Robo-advisor platforms use automated questionnaires to gather “know your client” (KYC) information.

In CSA’s the notice, the regulator emphasizes that “an online advisor’s KYC process must amount to a meaningful discussion with the client or prospective client, even if that discussion is not in the form of a face-to-face conversation.”

A registered advising representative (AR) then is responsible for making sure that meaningful discussion takes place. According to the CSA, an AR must determine whether enough KYC information has been gathered to support a client’s suitability for a specific investment portfolio.

In some cases, a robo-advisor may require ARs to contact clients directly before the KYC process is complete, while ARs at other companies may contact clients only if they have questions or concerns about the information collected online.

Once all the necessary KYC information is gathered, ARs must ensure that any software-generated investment portfolios recommended to clients are, in fact, suitable for those individuals. ARs also must review any new KYC information provided by a client, such as a change in marital status or birth of a child.

This model is in contrast to U.S.-based robo-advisors, which are far more technology-driven.

“The online advisors that have been approved to carry on business in Canada are not ‘robo-advisors’ of the kind that are operating in the U.S., [the latter of] which may provide their services to clients with little or no involvement of an AR,” the CSA notice says.

For example, New York-based robo-advisor Betterment LLC does have certified financial planners on staff; however, clients of that robo-advisor cannot contact these individuals directly. Instead, Betterment’s platform tools make recommendations to clients, such as having a safety net fund or how to get back on track with their financial goals.

Other robo-advisor platforms in the U.S., such as Redwood City, Calif.-based Personal Capital Advisors Corp., do offer a hybrid platform, something Pat Onyskiw, principal with Toronto-based PUR Investing Inc., expects to see more of in the future.

The U.S. market is likely to lean toward a model in which an advisor is available by phone, for example, to clients in times of market volatility – as has been the case in recent weeks, says Onyskiw: “I think this [recent] market downturn helped prove that particular point that there had to be somebody to talk to.”

In the meantime, having enough ARs on staff to meet the CSA’s regulatory requirements north of the border could mean higher costs for Canadian robo-advisors than for their U.S. counterparts, says Cass. However, these online advice platforms will probably be able to find other ways to cut expenses as they grow.

“I fully believe there will be innovative, efficient ways to communicate with our client base as they need it in real time down the road,” Cass says. “And innovation will help us scale these costs down.”

As an example, an AR might communicate with clients via an online chat application in which the AR could be “speaking” with multiple clients at a time.

The guidelines also could evolve as different robo-advisor platforms emerge. At the moment, regulators do not have specific terms and conditions for online advisors regarding how to contact prospective clients during the “onboarding” process. However, the CSA emphasizes, it may have guidelines in the future.

“We will consider whether terms and conditions will be appropriate for different operating models as they develop over time,” the CSA notice says.

The notice includes examples of how KYC information can be gathered absent a face-to-face conversation. According to the CSA, a well-designed online questionnaire includes:

– behavioural questions;

– a technology platform that prevents a client from progressing without answering all required questions, tests for inconsistencies in answers and flags such instances for an AR to contact the client;

– offers investor education; and

– reminds clients they can contact an AR at any time.

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