One of the most popular innovations that the fintech industry has given rise to in recent years is the introduction of digital advice (also known as ‘robo-advice’). Although the roboadvice industry covers various aspects, low-cost investment and advice solutions are emerging as the most popular.
Both technology companies and established financial service business are pushing to expand their services into the online and automated field, trying to build up their own reputation and confidence for retail clients to first take some form of advice, and then expand their investment portfolios.
Investment apps such as Acorns Investment App and Betterment have been successful in attracting retail clients to use their online investment services due to the ease of use, advanced user interface and low fees.
Like existing advice businesses, online services can choose whether to provide scaled or general advice to retail clients. In the ASIC Consultation Paper 254, released in March 2016, ASIC indicated that only 20 per cent of Australian adults seek financial advice. The growth of the roboadvice industry is expected to lower the cost and increase the accessibility of financial advice for Australian retail clients.
However, one question stakeholders should ask in relation to personal roboadvice is: What percentage of the population actually has the financial resources to implement the tailored strategies generated by the robo-advisers?
The future of personal robo-advice may not be as encouraging as it is made out to be.
In August 2016, ASIC published its final guidance for robo-advice – Regulatory Guide 255 Providing Digital Financial Product Advice to Retail Clients (RG255) – setting out what ASIC expects digital advice providers to do in order to comply with the law.
Like with all of ASIC’s regulatory guidance, it is possible for operators to comply with the law in a different way from what is proposed by ASIC in RG255, however, such alternative ways may come at higher costs because it will require robust review (and potentially defence) by legal and compliance advisers. ASIC’s deputy chairman Peter Kell expressed ASIC’s support for “development of a healthy and robust digital advice market in Australia as a convenient, low-cost option for retail clients”, and said that RG255 aims to increase the confidence of retail clients when dealing with digital advice providers.
Unlike Mr Kell, various stakeholders in the financial service industry are of the opinion that RG255 is far from cutting edge, as it is merely a summary of existing ASIC regulatory guides.
This article examines the key aspects of RG255 that digital advice providers should keep in mind, from the licensing stage through to the actual provision of advice.
What is robo-advice?
Robo-advice is the provision of automated financial product advice using algorithms and technology, and without the direct involvement of a human financial planner.
The system through which robo-advice is generated and provided generally asks users a set of questions about their personal and financial circumstances and objectives.
The answers to these questions are then processed by algorithms underpinning the system to form a risk profile for the user and generate financial advice accordingly.
Depending on the sophistication of the robo-advice system, some can conduct portfolio analysis and suggest personal investment strategies without the involvement of an advisor.
A key reason for roboadvice’s increasing prominence in the financial service industry is the benefit of increasing accessibility to retail clients at what is generally a significantly lower cost.
However, the use of complex algorithms and mathematical models could also increase the associated risks of roboadvice – if one element in the system breaks down, the user may suffer losses and, given the digital nature of the system, such problems may be replicated in high volumes resulting in significant detriment to multiple clients.
Regulatory Guide 255
ASIC’s RG255 contains no departures from ASIC’s existing policy directions and does not introduce any new regulatory concepts or interpretations.
From a licensing perspective, the FPA’s recommendation to require at least two responsible managers was not adopted by the RG255, which requires only one.
However, digital advice providers or new entrants to the market must check all procedures against the protocols to ensure compliance with RG255.
In particular, RG255 requires digital advice providers to:
– Test algorithms and review advice;
– Ensure adequate compensation arrangements are in place; and
– Comply with the best interests duty as set out in the Corporations Act.
Melody Gao is a lawyer at legal and compliance services firm Sophie Grace
Good article