Robo Advice in a nutshell

In South Africa, automation of financial advice is still relatively scarce, but very likely to surge in the next few years.

In the USA, it already plays an important role in the investment space, which led to the authorities spreading its regulatory net to include such advice.

The information below is extracted from an update published in February by the Investment Management Division of the US Securities and Exchange Commission, and sketches a clear picture of robo-advice in the States, and why it should be included under the regulatory microscope.

Automated advisers, which are often colloquially referred to as “robo-advisers,” represent a fast-growing trend within the investment advisory industry, and have the potential to give retail investors more affordable access to investment advisory services as well as change the competitive landscape in the market for investment advice.

While many robo-advisers were initially geared towards millennials, their popularity has been expanding among all age groups and classes of investors. Robo-advisers, which are typically registered investment advisers, use innovative technologies to provide discretionary asset management services to their clients through online algorithmic based programs.

A client that wishes to utilize a robo-adviser enters personal information and other data into an interactive, digital platform (e.g., a website and/or mobile application). Based on such information, the robo-adviser generates a portfolio for the client and subsequently manages the client’s account.

Robo-advisers operate under a wide variety of business models and provide a range of advisory services. For example, robo-advisers offer varying levels of human interaction to their clients.

Some robo-advisers provide investment advice directly to the client with limited, if any, direct human interaction between the client and investment advisory personnel.

For other robo-advisers, advice is provided by investment advisory personnel using the interactive platform to generate an investment plan that is discussed and refined with the client.

Robo-advisers may also use a range of methods to collect information from their clients. For example, many robo-advisers rely solely on questionnaires of varying lengths to obtain information from their clients. Other robo-advisers obtain additional information through direct client contact or by allowing clients to provide information with regard to their other accounts.

Potential Considerations under the Advisers Act

In the USA, robo-advisers, like all registered investment advisers, are subject to the substantive and fiduciary obligations of the Advisers Act. Because robo-advisers rely on algorithms, provide advisory services over the internet, and may offer limited, if any, direct human interaction to their clients, their unique business models may raise certain considerations when seeking to comply with the Advisers Act. Three distinct areas were identified to provide suggestions on how robo-advisers may address them:

  1. The substance and presentation of disclosures to clients about the robo-adviser and the investment advisory services it offers;
  2. The obligation to obtain information from clients to support the robo-adviser’s duty to provide suitable advice; and
  3. The adoption and implementation of effective compliance programs reasonably designed to address particular concerns relevant to providing automated advice.

In South Africa, one would need to add a fourth element. If the outcome for your client is not satisfactory, you cannot pull a Hansie and say “The robo made me do it.” Your disclosure documentation should be constructed in such a manner that it demonstrates your commitment to the fair treatment of clients.

Local regulatory authorities are already factoring in possible control measures to ensure that automated advice, too, toes the line.

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