Robo-Technology presents unique Compliance Challenges


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By: Amber Tatman

For any skeptics, late adopters or those who viewed robo-technology as a passing fad, the time for ambivalence is over; the verdict on robo-advisers is in and they are here to stay. Robos are well positioned to thrive as technology continues to advance, as small investors increasingly find traditional advisory services cost-prohibitive, and as regulatory and industry forces such as the DOL Fiduciary Rule and the trend toward passive management styles combine to create the perfect climate for robo-tech success. However, whether advisers are standalone robo-advisers or choose to adopt robo-technology in order to provide additional service options for clients, robo-technology presents unique compliance challenges of which advisers must be cognizant.  On November 14, 2016 the SEC convened a Fintech Forum to discuss robo-technology and, although no rules were issued as a result, the SEC did issue guidance for both investors and advisers on February 23, 2017. Whether a standalone robo-adviser or an adviser utilizing robo-tech, it is crucial for such advisers to ensure they have addressed the following:

  • Disclosures should include plain English descriptions of the use of algorithms, as well as any relevant limitations or assumptions
  • Conflicts should be fully considered and disclosed, in addition to fees
  • Client ability to contact a live person should be described, including whether  such contact would be advisory or purely tech support/administrative in nature
  • Algorithms should be tested periodically
  • If clients and/or adviser will have the ability to override the algorithm, details must be disclosed and overrides documented
  • Suitability information collected must be sufficient to satisfy fiduciary duty and support a robust algorithm
  • Cybersecurity protections and procedures are a necessity and should be tailored to the robo- technology being used

The above is only a partial list of concerns; there are are many other factors that must be considered as well. If you are currently exploring or have recently adopted robo-tech, NRS can help you with everything from initial adoption considerations, to registration and/or due diligence, to the creation or modification of policies and procedures, ADV Brochure and advertising considerations, to documentation and testing. Contact us for more information.

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