As we reported in Part 1 of this series of posts, the U.S. Securities and Exchange Commission held its first forum exclusively focused on the impact of the FinTech movement on November 14, 2016. The first panel of the forum addressed recent innovations in investment advisory services. The panel was comprised of Ben Alden, General Counsel of Betterment, Bo Lu, Co-Founder and CEO of Future Advisor at Blackrock, Mark Goines, Vice Chairman of Personal Capital, and Jim Allen, Head of Capital Markets Policy Group, CFA Institute. While several of the panelists lamented the use of the title “Robo Adviser,” the panel’s discussion was vibrant and delved deeply into the role robo advisers (advisers which rely to varying degrees on computer-based technology, primarily algorithms, to deliver investment advice) are and should be playing in the United States.
First, the panel discussed the growth in automated advice, attributing the growth to the ability of lower net worth investors, especially those comfortable with technology, to obtain affordable and sophisticated investment advice. Given the savings shortfall in the United States, this growth was viewed to be a positive trend. Further, the panel also noted that the DOL Fiduciary Rule is also driving growth. Ultimately, the panelists thought that the industry would consolidate as assets under management grew.
However, despite the generally sanguine view on the prospects for automated advisory services, some clear regulatory concerns emerged. Automated advisory services are subject to existing industry rules, and generally the regulatory concerns are the same as with respect to traditional advisory businesses. However, the emerging uses of technology by robo advisers present new challenges for regulators in ensuring compliance with those rules. For example, are automated systems sufficiently robust to ensure suitability in investment recommendations? Concerns also focused on the design and oversight of algorithms. Because algorithms are repeatable and testable, they are easily audited by regulators and accountants. But are advisers disclosing sufficient information regarding the operation of algorithms and the associated risks and limitations? And how are algorithms monitored and adapted over time? Of course, data protection, privacy and cybersecurity are concerns (especially for robo advisers that aggregate client account information from multiple sources). While the panel recognized the Advisers Act is a principles based statute flexible enough to address automated advisory services, there are still many questions the SEC needs to consider in developing its regulatory approach.