The U.S. Financial Industry Regulatory Authority (FINRA) issued a new report on Tuesday that offers guidance and spells out best practices for firms prodiing digital investment advice tools, such as robo-advisors.
These sorts of offerings “need sound governance and supervision, including effective means of overseeing suitability of recommendations, conflicts of interest, customer risk profiles and portfolio rebalancing,” the FINRA report says. It also stresses the importance of training and education for financial professionals who use digital advice tools, and includes some guidance for investors.
“Firms need to establish and maintain an investor protection foundation that accounts for the considerations raised by digital investment advice,” the FINRA report says. “One key element of that foundation is understanding customer needs. Another is using tools with sound methodological groundings, and a third is understanding those tools’ limitations.”
FINRA’s report outlines regulatory principles and practices in five key areas: governance and supervision of algorithms; customer profiling; supervision of portfolios and conflicts of interest; portfolio rebalancing procedures; and training to ensure that advisors understand the key assumptions and limitations of digital advice tools.
See: IIROC puts focus on suitability, robo-advisors for 2016
The FINRA report also has recommendations for investors that use robo-advisor services, including that they should evaluate whether firms are gathering enough information to understand their needs and risk tolerance.
“Investors should be aware that conflicts of interest can exist even with digital investment advice, and that the advice they receive depends on the investment approach and underlying assumptions used in the digital tool,” the FINRA report says. Additionally, it recommends that investors ensure that they understand the fees they are paying, and services they are receiving from digital advisory services.
“We trust that the report will provide information and guidance for FINRA member firms and investors about key aspects of the rapidly growing arena of digital investment advice,” says Richard Ketchum, chairman and CEO of FINRA, in a statement announcing the report’s release.
“As these services develop, firms need to ensure that the core principles of investor protection — such as understanding and responding to customers’ needs and objectives — serve as the foundation of these new tools as well,” he adds.