As financial technology companies grow beyond the startup phase, they are pressing up against the rules and regulations governing traditional financial institutions.
The friction highlights a debate over new companies looking to disrupt the industry landscape and established institutions looking to maintain their position. Is the existing regulatory framework protecting consumers from harm, especially the young and inexperienced investors many fintechs are targeting, or is it stifling innovation that could create a more open, transparent and equitable financial services industry?
It's an old debate and one not limited to finance (just look at Uber versus the taxi industry, or Airbnb versus hotels), but one that lit up the advisory community at the end of 2018 when two prominent fintech companies, Robinhood and Wealthfront, both found themselves in hot water.
The former launched a "checking and savings" service that it said would operate similar to bank accounts and provide 3% interest. Many felt Robinhood wasn't being totally transparent with consumers about risk in the account, however small it may be, and accused the digital brokerage of using slick marketing to deceive investors.
The reaction was swift. Though Robinhood said accounts would be protected by the Securities Investor Protection Corp., SIPC president and CEO Stephen Harbeck publicly disagreed. The Senate Banking Committee sent letters to the Securities and Exchange Commission and the Federal Deposit Insurance Corp. expressing concern that Robinhood was trying to "circumvent regulatory scrutiny." Republicans and Democrats signed the letter in a rare showing of bipartisan agreement.
As for Wealthfront, the SEC fined the digital adviser for making false statements about its tax-loss harvesting features and for violating rules regarding testimonials by retweeting positive statements without the required disclosures.
But for those looking to shake up the industry status quo, these companies are doing what's necessary to enact real change in a long-stagnant industry. Fintech defenders, enthusiasts and evangelists say Robinhood's free trading app already made the stock market more accessible, and its checking and savings services could potentially help the 8.4 million Americans (according to FDIC data) without a banking account.
"They are disruptors; they push the boundaries," said Tyrone Ross, managing partner at NobleBridge Wealth.
Maybe Robinhood didn't lay everything out with complete clarity, but when does Wall Street ever? As for Wealthfront, Mr. Ross questions how relevant a testimonial rule written in the 1940s is for social media engagement in 2019.
Instead of viewing this as a case of startups skirting rules to achieve growth, folks like Mr. Ross see upstarts as trying to empower communities traditionally ignored by the industry, especially people of color. Rather than letters written in concern for investors' safety, they see lobbying power protecting the interests of financial institutions looking to crush new competition.
"What many fail to realize — or dislike — is that for a long time banking and investing in this country has been exclusive, and now its inclusive," Mr. Ross tweeted. "What I don't want to get lost in this is the fact there is a whole new generation of folks who just want the opportunity to invest, save and improve their lives. When you're drowning you don't ask for a particular color of life preserver."
Others however fear that instead of life preservers, fintech companies are handing out anchors. After all, rules are in place for a reason.
For example, Charles Schwab's YieldPlus Bond Fund was similar in many respects to Robinhood's Checking and Savings and ended up costing investors millions despite claims the fund was a low-risk alternative to money-market funds. And just because a testimonial rule is old, it doesn't mean it's irrelevant and firms should be allowed to share positive tweets from paid bloggers.
The logic of the rule is still valid, and not allowing financial services firms to cherry-pick positive reviews and investment results for prospective clients is potentially even more important than ever in the age of social media.
"The spirit of the rule is to protect against advisers who aren't as honest as you thought!" said one Twitter user in response to Mr. Ross.
The truth is the financial advice and investment management industry needs to modernize, but it can't do so by repeating mistakes made in the past. If fintech startups honestly want to disrupt finance, they need to prove they are more than just more convenient and less expensive alternatives to existing options.
Testing the boundaries and changing the rules is a great, but not at the expense of the ideals that guided the firms in the first place.