Questrade Wealth Management Inc. has agreed to pay $3-million in fines after investment regulators found the company failed to shield clients from a possible conflict of interest following the sale of its exchange-traded funds business to WisdomTree Investments Inc.
In a settlement agreement reached on Tuesday, Questrade Wealth – which operates an online portfolio manager (also known as a robo-adviser), agreed to pay a $2.9-million voluntary payment and $100,000 in costs to the Ontario Securities Commission after the regulator voiced concerns surrounding its robo-adviser business Questwealth Portfolios, which recently changed its name from Portfolio IQ.
Last week, the OSC alleged that Questrade did not have proper compliance measures in place to ensure that client portfolios weren’t at risk after its portfolio subadviser invested $15-million in WisdomTree funds. This was immediately after Questrade sold its ETF business to WisdomTree.
With the change of ownership of the ETFs, the OSC was concerned the investments may not have been suitable for clients because there was no documentation.
“[Portfolio managers] must take reasonable steps to identify and respond to a conflict of interest before investing client money so as to ensure that they are acting in the best interest of their clients," the OSC said in the settlement agreement.
In July, 2017, ETF provider WisdomTree paid $2.4-million to acquire and manage all eight of Questrade’s ETF products with approximately $89-million in assets under management. During that purchase agreement, WisdomTree advised Questrade it wanted WisdomTree ETFs to be included in Questrade’s robo-adviser ETF portfolios before finalizing the transaction, according to the OSC settlement. Questrade refused, telling WisdomTree that the ETFs would not be included in the client portfolios unless the portfolio manager determined that such a purchase was “in the best interest” of the robo-adviser clients.
Before the transaction was finalized, Questrade’s subadviser One Capital Management LLC, which was providing investment advice for managing the ETF portfolios, agreed it would recommend significant amounts of WisdomTree ETFs for client portfolios, but failed to document why it believed it was in the best interest of the clients.
In the OSC settlement it is noted that as portfolio manager of the robo-adviser accounts, Questrade was “ultimately responsible for determining whether [the purchase of WisdomTree ETFs for its online portfolios] was suitable and that it did not conflict with the interests of its clients.”
The OSC also found that Questrade failed to document why it determined no conflict of interest was present until almost a month after the sale of its ETF business to WisdomTree, contrary to its own policies.
In addition to paying a fine, Questrade has hired an independent consultant to conduct a suitability review for all clients in all affected ETF portfolios. The independent consultant will review the appropriateness of WisdomTree ETFs for the model portfolios, and provide both Questrade and the OSC with the conclusions of the review.
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