Industry experts note gaps in one watchdog’s efforts to set guidelines
Canadian securities regulators have been working to create guidelines and rules to operate in the growing fintech space. Their efforts are an exercise in balance: as robo-advisors and other players ask for leeway and freedom, traditional financial firms are calling for fair and balanced oversight.
The same conversations are occurring south of the border. This past spring, the US Securities and Exchange Commission (SEC) published updated guidelines for advisors, specifically on how to deal with disclosure and suitability issues raised by new automated investment services, reported Financial Advisor IQ.
The guidelines are actually nothing new, according to legal and wealth management experts polled by the publication. Todd Gibson, a Pittsburgh-based investment management lawyer, views recent moves by the SEC as a way to “underscore what it takes to act as a fiduciary under current regulations.”
Attorney Melanie Fein — who is based in Washington, DC, and specializes in financial services — asserted that there are gaps in the current guidelines. She noted that information requested in robo-advisors’ questionnaires don’t seem to reflect the “totality” of clients’ financial circumstances, which is legally necessary for fiduciaries to provide recommendations.
She also observed that such companies are allocating more assets into a limited group of investment “buckets.” While robo managers assert that they can refine client allocations more succinctly than mass-market fund providers, Fein warned that they could start to look and act more like mass-market mutual funds as they become more popular.
Scott MacKillop, CEO at Denver-based First Ascent Asset Management, expressed concern over regulators judging robos in the same fiduciary manner as human advisors. “Lumping human advisors into the same regulatory category as robos is nothing other than a big charade,” he told the publication. “The technology just isn’t there yet … Even brokers who adhere to basic suitability standards act in a more fiduciary manner than most robos.”
MacKillop is urging regulators to be “highly skeptical,” even toward those that claim to provide “smarter” robo services. “The bottom line is that the SEC needs to create an entirely separate group of regulations to oversee robos,” he said.
Not everyone is so doubtful. Tom Baker, a professor at the University of Pennsylvania Law School, said he doesn’t see signs that current robos are poorly designed. He views the people putting them together as “quite idealistic” and showing “sound fundamental academic knowledge.”
Along with a professor at Erasmus University Rotterdam in the Netherlands, Baker authored a study called Regulating Robo Advice across the Financial Services Industry. The paper argues that today’s rules are fine short-term, but more refined regulations will be needed as technologies evolve over the long run.
He noted that robos are now mostly using strategic allocation and index-based strategies. However, he added, recent developments like a crop of actively managed robos and a surge in human-robo hybrid businesses suggest a trend toward enhanced performance to justify higher fees.
While he’s argued for a gradual stepping-up of regulation, Baker conceded that additional regulation might create “cost barriers” to enter the industry and prove “too burdensome for incentivizing true innovation.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Are you prepared for the robo revolution?
Robo-advisors ask for slack on know-your-client conversations
Regulator robo guidance reflects challenge to advisors
The same conversations are occurring south of the border. This past spring, the US Securities and Exchange Commission (SEC) published updated guidelines for advisors, specifically on how to deal with disclosure and suitability issues raised by new automated investment services, reported Financial Advisor IQ.
The guidelines are actually nothing new, according to legal and wealth management experts polled by the publication. Todd Gibson, a Pittsburgh-based investment management lawyer, views recent moves by the SEC as a way to “underscore what it takes to act as a fiduciary under current regulations.”
Attorney Melanie Fein — who is based in Washington, DC, and specializes in financial services — asserted that there are gaps in the current guidelines. She noted that information requested in robo-advisors’ questionnaires don’t seem to reflect the “totality” of clients’ financial circumstances, which is legally necessary for fiduciaries to provide recommendations.
She also observed that such companies are allocating more assets into a limited group of investment “buckets.” While robo managers assert that they can refine client allocations more succinctly than mass-market fund providers, Fein warned that they could start to look and act more like mass-market mutual funds as they become more popular.
Scott MacKillop, CEO at Denver-based First Ascent Asset Management, expressed concern over regulators judging robos in the same fiduciary manner as human advisors. “Lumping human advisors into the same regulatory category as robos is nothing other than a big charade,” he told the publication. “The technology just isn’t there yet … Even brokers who adhere to basic suitability standards act in a more fiduciary manner than most robos.”
MacKillop is urging regulators to be “highly skeptical,” even toward those that claim to provide “smarter” robo services. “The bottom line is that the SEC needs to create an entirely separate group of regulations to oversee robos,” he said.
Not everyone is so doubtful. Tom Baker, a professor at the University of Pennsylvania Law School, said he doesn’t see signs that current robos are poorly designed. He views the people putting them together as “quite idealistic” and showing “sound fundamental academic knowledge.”
Along with a professor at Erasmus University Rotterdam in the Netherlands, Baker authored a study called Regulating Robo Advice across the Financial Services Industry. The paper argues that today’s rules are fine short-term, but more refined regulations will be needed as technologies evolve over the long run.
He noted that robos are now mostly using strategic allocation and index-based strategies. However, he added, recent developments like a crop of actively managed robos and a surge in human-robo hybrid businesses suggest a trend toward enhanced performance to justify higher fees.
While he’s argued for a gradual stepping-up of regulation, Baker conceded that additional regulation might create “cost barriers” to enter the industry and prove “too burdensome for incentivizing true innovation.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Are you prepared for the robo revolution?
Robo-advisors ask for slack on know-your-client conversations
Regulator robo guidance reflects challenge to advisors
