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Markets and Securities Services |
United States
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The robo-adviser business model
Robo-advisers incorporate technologies into
their portfolio management platforms primarily
through the use of algorithms designed to
optimise wealth management services. Robo-
advisers’ business models range from fully
automated platforms (which have features that
let investors direct the management of their
portfolios without direct human interaction) to
“hybrid” or adviser-assisted platforms (which
combine a digital client portal and investment
automation with a virtual financial adviser
typically conducting simple financial planning
and periodic reviews over the phone).
Robo-advisers typically collect information on
clients and their financial history using online
questionnaires. These questionnaires often
solicit information on the client’s age, income,
investment horizon, risk tolerance, investment
experience and investment objectives, among
other information. Robo-adviser platforms use
the information input by the client to help the
client select a risk profile. The firms then use
algorithms to generate a suggested investment
strategy for the client based on that risk profile.
Platforms can automatically rebalance clients’
portfolios in response to the performance of the
portfolio’s investments and the clients’ goals.
The SEC’s regulatory and compliance
expectations for robo-advisers
The SEC regulates investment advisers, which
generally includes firms that provide digital
wealth management platforms. Robo-advisers
registered with the SEC are subject to the same
regulatory framework as traditional investment
advisers that are registered with the SEC.
The SEC has made it clear that it plans to
dedicate significant regulatory scrutiny to
robo-advisers going forward. For example,
in its Examination Priorities Letter for 2017,
the SEC’s Office of Compliance Inspections
and Examinations (OCIE) listed “Electronic
Investment Advice” as its first examination
priority under the topic of “Protecting Retail
Investors.”
2
In addition, the SEC has released
an Investor Bulletin to help explain the costs,
risks and benefits of robo-advisers to retail
investors
3
and an Investor Alert that provides
ROBO-ADVISERS IN THE US:
THE EMERGING REGULATORY
FRAMEWORK
The last few years have seen significant growth in the availability and popularity of
automated digital investment advisory programmes (often called “robo-advisers”).
These programmes allow individual investors to create investment accounts
through a web portal or mobile application, sometimes with little or no interaction
with a human being, with the potential benefit of lower costs than traditional
investment advisory services.
Given the emergence of the robo-adviser industry, the U.S. Securities and
Exchange Commission (SEC), the primary regulator of robo-advisers doing
business in the US has taken a keen interest in ensuring that robo-advisers
under its jurisdiction meet their regulatory and compliance obligations under
the Investment Advisers Act of 1940, as amended (the Advisers Act).
1
In this article, we provide an overview of the robo-advisory industry and typical
business models. We then discuss the particular regulatory and compliance
risks that SEC staff has identified in the typical robo-adviser business model
and staff suggestions for addressing these risks.