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portfolio strategy

The latest innovation in do-it-yourself investing is that you no longer have to be all by yourself.

Online broker BMO InvestorLine will on Monday introduce a service where clients choose their own securities and make their own trades while also benefiting from advice. InvestorLine claims to be the first online broker in Canada to offer clients the option of investing entirely on their own or with personalized assistance.

The new service is called adviceDirect and it targets people with at least $100,000 in assets. It works on a fee-based model where clients pay up to 1 per cent of the value of their account.

That's a fairly stiff cost for advice that comes partly over the phone from live representatives, but also by e-mail and communication over the BMO InvestorLine website. It also has to be noted that adviceDirect is strictly about investing and thus doesn't offer comprehensive financial planning. Yet adviceDirect is still worth considering if you don't see yourself using an adviser but are uncomfortable with DIY investing.

Be honest with yourself – have you made more than your fair share of bad decisions managing your money? Are you sitting on a lot of uninvested cash because you're intimidated by the tough market conditions of recent years? Online brokerage firms are well aware of this latter group of people because they consume the firms' resources in areas like record-keeping, but contribute nothing in terms of fee and commission revenue.

"A significant portion of our clients, and I don't think we're any different from other online brokerage, are inactive. They're not doing anything," said Connie Stefankiewicz, senior vice-president at Bank of Montreal. "We wanted to develop a service that would make them more involved and engaged in their investment portfolios."

BMO believes some of its self-directed InvestorLine clients will migrate over to adviceDirect, but it also expects to draw new customers with a feature that distinguishes it from other online brokers.

Ms. Stefankiewicz describes adviceDirect as "marrying the best of technology with a human element." It's a combination that required a special exemption from regulators, who are strict about online brokers acting only as order takers. BMO got around this by developing an online version of the know-your-client (KYC) process that anyone who provides advice must go through with new clients.

After adviceDirect clients fill out the KYC form, they get a call from an accredited representative to ensure they have picked the right profile from among four choices – income, balanced, growth and aggressive growth. From there, the technology takes over. Using an online tool called a portfolio optimizer, clients are presented with specific trade ideas based on their needs. Individual stocks are an option, as are exchange-traded funds and mutual funds.

Securities are chosen for clients on the basis of ratings from two independent outside firms, MarketGrader for stocks and Lipper for funds. Clients can follow the recommendations, or make their own choices. In the latter case, adviceDirect will provide feedback on the website by showing the projected impact on the portfolio.

Clients of adviceDirect pay 1 per cent annually on holdings of up to $500,000, 0.75 per cent on amounts to just under $1-million and 0.5 per cent for anything larger. Included in the fee is the cost of a set number of trades of all types of securities. A small account would get 30 trades included – a few extras would not incur additional charges as long as the client isn't actively trading in the account. Not included in the account fee is the cost of owning investments like ETFs and mutual funds.

Clients pay their advice fees in quarterly instalments out of cash from their accounts, which raises the question of what value adviceDirect provides on an ongoing basis. In the day to day, adviceDirect clients get continual electronic monitoring of their portfolios to ensure they're on track according to four criteria – asset allocation, risk, diversification and rating of individual securities. If something is out of whack, clients get both an e-mail and notification when they view their accounts online.

In addition to highlighting problems, adviceDirect guides clients through possible solutions (example: sell a certain percentage of bond exposure to buy stocks), suggests securities to buy and then lays out a path for buying them if the client wants to proceed.

There's also a human touch that comes from connecting each adviceDirect client with a team of registered representatives, which is an investment industry term for someone who has taken required courses and been approved by regulators to sell securities. This is a rudimentary level of training and not on par with the Certified Financial Planner (CFP) designation that many full-service advisers have.

Clients can call a representative any time from 8 a.m. to 8 p.m. Monday through Friday, and they also get an annual portfolio review. Representatives are on salary, so there should be no concerns about conflicts where something is recommended not because it benefits the client, but because if offers generous compensation to the seller.

The blend of human contact and technology sounds just right for the sort of investor who wants a co-pilot while retaining ultimate control of the portfolio. The challenge for BMO will be persuading investors that this assistance is worth a cost that essentially slices up to a full percentage point off returns.

The savvy, experienced do-it-yourselfer will scoff, of course. The whole idea of self-directed investing is to pay less and thus create the potential to make bigger returns. But there are two situations where a 1-per-cent fee is worth considering. One is you want advice, but don't feel you have a large enough account to get much attention from an adviser. Another is where you are committed to self-direct investing, but need help. Saving on fees means nothing if it can be said of you: He was a self-directed investor whose portfolio self-destructed.

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