WASHINGTON – As robo technology proliferates and evolves, regulators are keeping pace – and firms and advisers making use of such tools will have to follow suit, industry executives say.
"Think of it like email," Hardeep Walia, CEO of Motif Investing, told attendees at FINRA's annual conference.
Firms and advisers know that for compliance and regulatory reasons, they need to have certain policies and procedures in place to govern the use of email, Walia says.
"You may say, 'I don't know how to secure email so I'll outsource that,'" he says. Outsourcing it, however, doesn't relieve you of the responsibility for picking a vendor that is fully compliant with regulations, Walia says.
Similarly, digital advice technology is subject to due diligence and that responsibility is becoming ever more important as more firms roll out robo platforms for their advisers and clients.
While some firms such as Charles Schwab have opted to develop it in-house, others have teamed up with technology firms. UBS was the latest firm to announce such a partnership, signing a deal with SigFig to give its 7,000 advisers access to the startup's technology.
Walia's Motif has its own relationship with Goldman Sachs. The investment bank lead a $25 million financing round for the firm, and Motif in turn has developed offerings through Goldman based on its thematic investment-driven approach.
Such digital offerings will increasingly come under regulatory scrutiny. In March, FINRA released guidelines for firms using robos, noting that firms still have ultimate responsibility for the asset allocation recommendations that an algorithm provides to a client.
Some legal experts have also questioned whether robos can act as fiduciaries – a particularly pertinent issue given the Department of Labor's recent rule governing retirement advice as well as new indications that the SEC will craft its own fiduciary regulations in 2017.
Scott Cook, chief compliance officer at Charles Schwab, says that while at first glance the scope of the FINRA white paper appeared to be limited, his firm ultimately identified at least 90 digital tools within Schwab's broker-dealer that were potentially covered by the guidance FINRA issued.
"So on a second reading, we realized that the report is much broader," says Cook, who was speaking on the same panel as Walia.
QuoteCharles Schwab identified at least 90 digital tools within its broker-dealer were potentially covered by the robo guidance FINRA issued.
Walia says it is critical that executives and advisers pay greater attention to the digital tools they are acquiring and deploying. He cited one example that his team had found of a third-party asset allocation algorithm which relied primarily on 1980s data for some of its assumptions.
That material information is available, but it's imperative that you look for it, Walia says.
"If it is a product that you outsourced, then you need to establish how they are doing it. You have to get under the hood or partner with someone who can help you," he says. "If you are not building your own robo, then you will need to understand what makes a good digital advice tool different from a bad digital advice tool."
For his part, Cook says industry players should review the FINRA report. "It's a good map for a rapidly changing landscape," he says.
Rapid may even be an understatement. Though a relatively new phenomenon, robo advisers have already moved beyond simple asset allocations using a handful of ETFs.
"The models are going to get more complex while minimizing the retail investor's exposure to that complexity," Walia says.
Going hand-in-hand with greater sophistication: greater customization. Walia says companies are already looking at ways to "map your values to your asset allocation."
Quote"The models are going to get more complex while minimizing the retail investor's exposure to that complexity," Walia says.
And how firms determine clients' risk tolerance is likely to change too. Companies such as Amazon and Facebook already try to determine user patterns based on what books they read and what music they listen to.
"It's not far away where you can simple ask for someone's email and build a profile based just on that. So much information is already out there," Walia says.
He adds that his company is already looking at such technologies.
Meanwhile, regulators will be moving to keep pace with technological evolution. And firms and advisers will have to stay abreast of regulatory changes.
"Not every driver needs to know how every part of the car works, but they do need to know the rules of the road," says Steve Polansky, executive vice president at FINRA and who was moderating the panel.