BMO InvestorLine has received an exemption from securities regulators, allowing it to operate an online advice service through its discount brokerage platform, without also registering as an investment adviser.
According to Thursday’s OSC Bulletin, BMO InvestorLine has been granted an exemption from the requirement to register as an investment adviser while operating a service that would provide automated equity and mutual fund recommendations to clients. The decision allows the firm to offer a fee-based, full service brokerage service, known as adviceDirect, which will provide trading recommendations through its online trading platform with involvement of registered reps.
The decision notes that, without the exemption, BMO InvestorLine would be subject to adviser registration “because the advice to an adviceDirect client is provided through a combination of online advice and individual dealing representatives and not solely through an individual dealing representative.”
The Ontario Securities Commission (OSC) granted the exemption, subject to several conditions, including that it provides reports to the regulator six months after it launches, and again after a year, outlining any system integrity and compliance deficiency related issues; and any other information requested by OSC staff including information on suitability issues.
The decision indicates that a team of reps will be assigned to each client, and that clients will slot themselves into one of four investor profiles (income, balanced, growth and aggressive growth). The service will then provide trading recommendations directly to the client, “based on an analysis engine that evaluates a client’s portfolio holdings against his or her recommended investor profile”.
It notes that the recommendations will not favour related securities over third-party securities, and that it will provide clear disclosure to clients when a recommendation includes a related security. Also, reps will not work on commission, and the decision says there is no incentive within the compensation structure to encourage the sale of related party securities.
The involvement of reps will include discussing a potential client’s risk tolerance and account objectives during the account opening process, recommending a suitable investor profile for each applicant, and providing monthly monitoring of client portfolios and trading activity, and annual reviews, as part of its account supervision process. KYC information is also to be kept updated through both electronic communications and discussions with reps. They will also conduct suitability assessments when requested by the client, or when required under by the service’s suitability alert process. And they will provide relevant market commentary, research, and trade execution.
Separately, the Investment Industry Regulatory Organization of Canada (IIROC) also issued an exemption to BMO InvestorLine to facilitate provision of the new service, allowing it to collect KYC information, assess suitability, and make recommendations electronically rather than through a rep directly.
IIROC’s board granted the exemption, noting that it also considered denying the exemption, and instead seeking rule amendments to allow the sort of service BMO is proposing. However, the order indicates that the board concluded that it would be difficult to amend the rules without understanding how the service will work, and what issues may arise; and, without seeing if there is any demand for this sort of service or not. So, for now, it has decided to grant the exemption, and rule amendments may follow if necessary.