Today's most underserved investors are those who are halfway between being do-it-yourselfers and having an adviser.
Almost nobody on Bay Street seems to have an idea of how to target these people. One exception: Bank of Montreal, through the adviceDirect arm of its online brokerage, BMO InvestorLine.
In the investing business, there's no surer validation of a new initiative than having your competitors copy you. AdviceDirect has struck out on that count. After a full year in operation, no one else has introduced a service where clients invest online while receiving a combination of Web-based and person-to-person advice.
But adviceDirect is on to something in targeting people who gravitate to DIY investing, but need help. "The discipline adviceDirect gives a do-it-yourself investor can be very attractive for people who don't have the time, the experience or the confidence," says Viki Lazaris, president and CEO of BMO InvestorLine.
The black-and-white view of investing says people like this should have advisers, but let's get real. For multiple reasons, some investors choose to go it alone, whether they're fully equipped for DIY success or not.
AdviceDirect's fee starts at 1 per cent of a client's account value (there's a $100,000 minimum), which is pricey for advice dispensed without the foundational financial planning that the best advisers use to build investment portfolios. But it's a good option for the determined but shaky DIY investor who might end up building a portfolio through guesswork or letting money idle for years in cash.
The bulk of adviceDirect clients have come from InvestorLine and other traditional online brokers, Ms. Lazaris says. Eventually, she figures that roughly half of the clients will come from the DIY stream and half will be ex-advisory clients.
BMO won't say how many people have signed up for adviceDirect, but you get an idea of how busy things are in the fact that the advice team there comprises just eight people right now. If adviceDirect manages to build its franchise, it will be a result of the work done by these investment specialists (that's BMO's title for them).
When you set up an account at adviceDirect, one of these specialists calls you on the phone to go through a "know your client" process that helps dictate the mix of stocks and bonds in your portfolio. Afterward, you can talk directly to your specialist as required, or to one of the other team members.
Responding to client feedback, adviceDirect has added online bios and photos for its specialists so clients know who they're talking to. Each specialist is registered with the Investment Industry Regulatory Association of Canada as a registered representative, which means he or she is licensed to give advice on securities. Some specialists have, or are working toward, designations such as certified financial planner (CFP) and chartered financial analyst (CFA).
BMO claims client feedback about the specialists has been very positive. "Clients know they want to take control, but they're not fully ready to go out 100 per cent on their own," says adviceDirect consultant Rob Nuyten. "They get validation and constructive help to build a portfolio, but they're still in control of selecting their investments. That's very appealing to them."
Portfolio advice is dispensed online to adviceDirect clients, who indicate what investments they want to focus on – stocks, exchange-traded funds, mutual funds and/or bonds and guaranteed investment certificates. Individual securities are highlighted for clients based on a scoring system provided by the analysis firms MarketGrader.com (for stocks) and Lipper (for funds).
AdviceDirect monitors ratings for the securities in a portfolio and suggests clients exit when a "sell" rating comes through. The website also notifies clients when their asset allocation is out of whack, maybe because one particular stock has soared. "Maybe you've got a very good security, but you've got too much of it," says Mr. Nuyten. "We tell you exactly how many shares to sell."
These days, adviceDirect advisers are busy calling clients to conduct the annual reviews they get as part of the service. It's an opportunity to update the client's investing profile and discuss any issues.
Mr. Nuyten says clients typically need some hand-holding in the early days, and then get comfortable taking direction via the website. "The reason why people are attracted to adviceDirect is the independence. They're very comfortable, once they're set up and have made some investing decisions, to let the system operate and alert them of any changes."
Hard-core DIY investors will dismiss adviceDirect because of the cost, and they have a point. BMO seems to concede there are pricing issues by softening the impact in the first year. New clients get $250 cash back when they activate their account and a one-year, 25-per-cent fee rebate that brings the cost to 0.75 per cent. After that, clients pay 1 per cent of their holdings in stocks, bonds and ETFs, but not cash balances (large accounts get a price break). Mutual funds held by adviceDirect clients have their own embedded advisory fees, so they're not subject to the 1 per cent, either.
The fee also covers the cost of at least 30 or so stock trades, more than enough to follow the kind of recommendations adviceDirect kicks out over a year.
Can you invest much more cheaply on your own? Absolutely. In an online brokerage account with $50,000 or more in assets, you'll typically pay nothing each year beyond a $10 per-trade commission. But can you be successful making your own decisions? That's the real test in weighing adviceDirect over a traditional online brokerage account.
Over the years, I've encountered hundreds of smart DIY investors who are completely self-sufficient. But in producing our online video series Portfolio Checkup – where you can get a second opinion on your investments from an adviser and me – I've seen a few serious issues crop up continually. Examples include excessive amounts of money held in cash, little or no exposure to U.S. and global markets, too much emphasis on stocks over bonds and a tendency to hold onto investments that lost money. AdviceDirect addresses all of these pitfalls.
Imagine a client who is hanging onto shares that have plunged in value over the past couple of years. He may be holding on out of blind optimism, or because he doesn't understand that there are better opportunities elsewhere. In an adviceDirect account, a red "sell" indicator appears beside a troubled stock with a link to a report explaining the rating. Some direction is also provided on what to do next. "If we're going to suggest selling a stock, we're going to provide alternatives for clients to take a look at, or they can go to the recommended list for the specific sector they're looking at," Mr. Nuyten says.
If adviceDirect clients outgrow the service and don't want to pay the 1-per-cent fee any more, they can easily have their account moved to BMO's online broker, InvestorLine. "Happy to do that," Ms. Lazaris says.
Read more from Portfolio Strategy.
For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).
Rob Carrick