Robo-advisers sound off to SEC about rule changes for automated advice

Digital-advice firms tell the Securities and Exchange Commission they put clients' interests first and that some regulatory updates are needed as digitization of the industry grows

Nov 14, 2016 @ 1:02 pm

By Liz Skinner

Online-advice providers told regulators that they uphold the nation's securities laws, including the fiduciary standard of care for investors, but think some rule updates are needed as digitization of the industry grows.

The SEC hosted a forum of financial technology experts Monday to discuss the impact of innovations in investment advice and other financial services. SEC staff is considering whether further guidance or even new rules are needed to protect investors.

“We are looking at how advisers provide investment advice with limited, if any, human interaction,” said Mary Jo White, chairwoman of the SEC, in opening remarks. “We also are considering how automated advisers are designing their compliance programs to address the particular challenges relevant to providing automated advice and how these firms safeguard client data and address business continuity in the event of a disruption.”

Automated-advice providers, often called robo-advisers, register with the Securities and Exchange Commission as investment advisers and are subject to the Investment Advisers Act, which requires clients' interests to come first when providing recommendations, among other standards.

Regulators have questions about how that happens when recommendations are generated by algorithms, and in May the SEC and the Financial Industry Regulatory Authority Inc. alerted investors to the risks associated with using a digital provider over a human.

Representatives of several automated-advice providers said Monday they provide high-quality financial advice that puts clients' best interests at the forefront.

"We take the fiduciary responsibility very seriously," said Ben Alden, general counsel for Betterment. "It's really what this whole movement is about."

In fact, live advisers had better start using technology like the robo-advisers have developed if they expect to deliver advice that takes into consideration a client's full financial picture, said Mark Goines, vice chairman of Personal Capital, which combines digital and human advice.

“Advisers must move forward and use technology to be holistically advising clients properly,” he said. “If you don't, you're going to miss something, as things happen too quickly today and clients' lives are too complicated.”

Mr. Goines said the average Personal Capital client has 15 accounts.

(More: How fintech aims to make DOL fiduciary rule manageable)

Mr. Goines said there are two areas where securities rules demand updating.

First as regards adviser examinations the SEC staff carries out.

“What we do is different than the way they've examined the companies that are in our space before,” he said.

During the one examination of Personal Capital, some of the questions SEC examiners asked didn't really apply, and some of the questions that the probe generated didn't really make sense, he said.

(More: Why robos should be an 'eye-opener' for advisers)

How to deploy digital advertising is another area where the rules need clarification for companies that are delivering an automated service, he said.

Bo Lu, co-founder and chief executive of FutureAdvisor, Blackrock's digital wealth platform, said the rules need to remain flexible to accommodate emerging and not-yet-developed technologies, such as connected digital devices that are always on and adding to data about a client.

Jim Allen, the CFA Institute's head of the capital markets policy group, said his members question whether the advice that digital providers offer can be comprehensive enough to consider real-world factors going on in clients' lives.

“It's [in] the many and varied circumstances of investors that they may not receive the appropriate, personalized advice that you would hope they would have,” he said during the morning panel. “Of course, that similar lack of imagination affects human advisers as well.”

[Correction: An earlier version of this story mistakenly attributed the comments about live advisers needing to adopt technology to be holistic with clients, and the average number of client accounts of 15, to Ben Alden of Betterment. They were actually the comments of Mark Goines of Personal Capital.]

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

Dynasty's Penney: The professionalization of the RIA industry

The RIA profession is evolving rapidly, but why and how? Shirl Penney of Dynasty Financial examines how the industry is growing and consolidating and what's next.

Latest news & opinion

Small broker-dealers seek legislative relief from annual audits

Bills introduced in House, Senate would remove PCAOB requirement.

Meet our new 40 Under 40s

For a fifth year, InvestmentNews is proud to shine a spotlight on the amazing accomplishments and potential of top young financial professionals.

Merrill re-evaluates commission ban in retirement accounts

The wirehouse's wealth management group announces a fresh look at the ban now that the DOL rule is on the brink of death.

10 biggest retirement mistakes

Adhere to enrollment deadlines and distribution rules or pay a hefty penalty.

DOL fiduciary rule on brink of death as key deadline passes

Justice Department didn't petition the Supreme Court to rehear the case. A mandate from the 5th Circuit would finally lay the fiduciary rule to rest.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print