The latest BlackRock Viewpoint titled Digital Investment Advice: Robo Advisers Come of Age is out.
The financial services industry is undergoing a significant transformation in the way that advisory services are provided and delivered to individual investors. This evolution is being driven by a variety of factors from new regulations, to changing demographics, to technological advances. Digital advisors – commonly referred to as “robo advisors” – have garnered considerable attention as regulators and investors attempt to understand the changing landscape. While digital advisors represent a very small segment relative to more traditional financial advice providers, their recent growth suggests a need for more education in this area. This paper reviews the landscape for digital advice, including the different business models present today, and the existing regulation of digital advice.
Digital advisors incorporate computer-based technologies into their portfolio management processes – primarily through the use of algorithms designed to optimise various elements of wealth management from asset allocation, to tax efficiencies, to product selection and trade execution. Digital advice is not all the same, with many digital advisors pursuing different business models and investment philosophies, as well as offering varying degrees of sophistication in the services provided. Importantly, digital advice services are subject to the same regulatory requirements as traditional financial advice, including supervision by the SEC and FINRA in the US, the FCA in the UK, and equivalent authorities in other jurisdictions. That said, with the emergence of any new innovation in financial services comes the need to consider the applicability of existing regulation and determine appropriate supervisory approaches. It would be helpful for regulators to explore best practices in digital advice while recognising that business models and technology will continue to evolve over time. In “Digital Investment Advice: Robo Advisors Come of Age,” we suggest that regulators focus on the following key areas:
1. Know your customer and suitability
2. Algorithm design and oversight
3. Disclosures and cost transparency
4. Trading practices
5. Data protection and cybersecurity
Click here to access the full report.