Automated portfolio management platforms in Canada require portfolio manager registration and must meet the same suitability and relationship obligations as human advisers.
Robo-advisors — platforms that automate portfolio construction and management based on client inputs — are subject to securities registration requirements in Canada. The automation of the investment process does not create an exemption from registration. A platform that manages a portfolio on a discretionary basis, even through an algorithm, is performing portfolio management activity that requires registration as a portfolio manager with the applicable provincial securities regulator.
A portfolio manager is an entity that engages in the business of managing the investment portfolios of clients on a discretionary basis. Discretionary management means making investment decisions on behalf of the client without obtaining the client’s specific approval for each transaction. Automated portfolio rebalancing, tax-loss harvesting, and asset allocation adjustments that occur without client instruction are discretionary management.
Registration as a portfolio manager requires the registrant to have a registered advising representative — an individual who meets the proficiency requirements set by the applicable regulator. In most provinces, those requirements include professional designations and relevant experience. A platform cannot register as a portfolio manager without having a qualified individual in the advising representative role.
Registration also requires the portfolio manager to meet the ongoing obligations that apply to registered advisers, including the obligation to act in the client’s best interest, to know the client and know the product, to assess suitability, and to maintain the records required by applicable securities legislation.
The know-your-client and suitability obligations that apply to registered portfolio managers apply equally to automated platforms. The fact that the suitability assessment is conducted through a digital questionnaire rather than a human conversation does not reduce the obligation to collect adequate information about the client’s financial situation, risk tolerance, investment objectives, and time horizon.
Regulators have scrutinized robo-advisor KYC processes and found instances where the digital onboarding questionnaire did not collect sufficient information to satisfy the know-your-client requirement. A questionnaire that is too brief, that does not ask follow-up questions based on client responses, or that produces portfolio recommendations inconsistent with the client’s stated profile creates suitability risk.
The platform also needs a process for updating client information on an ongoing basis. Client circumstances change, and the suitability obligation is not satisfied by a single questionnaire at onboarding.
Registered portfolio managers are required to provide clients with relationship disclosure information before or at the time of account opening. That disclosure includes a description of the services provided, the fees and charges the client will pay, any conflicts of interest, and the client’s rights under applicable securities legislation.
For robo-advisors that charge management fees as a percentage of assets under management, plus underlying fund fees, the total cost of the service needs to be disclosed in a way the client can understand. Presenting only the management fee without disclosing the total cost including underlying fund expenses does not meet the fee disclosure requirement.
A platform intending to operate as a robo-advisor in Canada should confirm that the platform’s activities constitute discretionary portfolio management, determine the registration requirements in each province where it will operate, identify the individuals who will serve as registered advising representatives, and design the client onboarding process to meet the know-your-client and relationship disclosure requirements.
The registration process for portfolio managers is administered by provincial securities regulators and involves a detailed application, review of the business plan and compliance procedures, and approval of key personnel.
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