Keeping Pace with Asia’s Evolving Robo-Advisory Regulatory LandscapeManaging Director at Privé Financial
This is the second article in a weeklong series on fintech.
The rise of the millennial investor is changing the dynamics of the financial advisory industry. Information accessibility has shaped the attitudes and expectations of millennial investors toward wealth management, and they are very different compared to traditional investors.
Due to these factors, many such investors are turning to robo-advisers: automated portfolio construction software that is fully distributed online. Generally, a robo-adviser will analyze investment products and propose investment vehicles on financial investment. As most robo-advisers rely on exchange-traded funds to construct a client’s portfolio, it is easier for a wide range of customers to understand the low-complexity product offering. Robo-advisers also enable retail customers to enjoy, to a certain extent, the private wealth management service that was previously too expensive for them.
Increasing Use of Robo-Advisers
In the high net worth individual (HNWI) customer segment, human connection and the relationship are essential in gaining the customer’s trust. That is why there are an increasing number of financial institutions starting to offer a “bionic” approach, where human wealth advisers are supported by robo-advisers in advising HNWIs. With the ease of personalization achievable with the robo-adviser solution, the bionic advisory engine is able to provide a unique experience to investors and allow relationship managers to focus more on the interaction with their clients.
The growing emphasis on digital transformation in terms of wealth management across the entire value chain of products and services by financial institutions also leads to the use of robo-advisers in the financial services sector. From a company perspective, the cost-saving advantage of robo-advisers is that they can reduce personnel and asset costs while serving a larger number of customers. By using this scalable technological solution, businesses will be able to manage relationships with their end-clients more effectively, which in turn can grow their assets under management. This creates a win-win situation for both financial institutions and investors.
With this rapid development and changing trends, financial organizations are still adapting to regulations, posing interesting challenges and opportunities for financial institutions and private investors alike. Changing regulations, such as the implementation of MiFID II in Europe and the 401(k) retirement plans in the U.S., transparency in disclosure and decision-making, and product-consumer suitability from financial institutions that can only be scalably achieved through a more digitized form of engagement are driving the change.
Regulatory Developments in Asia
Hong Kong and Singapore are two of the most developed wealth management centers in Asia, and with the emergence of new robo-advisory platforms, both have tightened regulations to ensure the suitability of advisory platforms and recommendations. The Hong Kong government requires all online advisory platforms to be registered or licensed if the business involves regulated activity. Online platforms have to provide details on how they determine the risk rating for investment products, and they have to inform clients of the scope of the services and the limitations. A robo-adviser has to detect possible algorithmic failures and halt trading when it is necessary. As most robo-advisers use an extremely scattered variety of investment algorithms and methodologies, the robo-adviser solution providers are expected to have a “suitably qualified person” to test and review the algorithm used to generate investment advice and inform clients of how and when the algorithm will rebalance the portfolio.
At the heart of this sea change is the ability of institutions to truly understand their end-customers.
In the case of Singapore, the regulator is implementing similar changes to regulations, with licenses required for robo-advisory, compulsory independent audit of digital advisory after first-year operations and involvement of seniors who have relevant experience in fund management. After all, it is not just about the user experience or interface of the robo-advisers, but the depth of the domain expertise involved in the technology.
Staying Abreast of Changing Regulations
With regulators introducing stringent suitability rules on the sale of investment products by online distribution and advisory platforms, the practitioner is required to continually learn and become technology-fluent to keep pace. The recent U.S. Securities and Exchange Commission enforcement against robo-advisers that were making false statements about their investment products should serve as a reminder that registered investment advisers are all subject to the regulatory requirement and must adopt adequate policies and procedures to ensure compliance.
Although technology may change how an investment adviser operates, financial regulators will still expect full compliance with all regulatory requirements. These changes in regulation necessitate that clients form a partnership with solution providers that not only excel in technological prowess, but also have extensive experience in the financial management industry.
Coupled with such changing regulations to protect end-consumers, there has also been an increasing push for transparency around the financial advisory business. Accordingly, financial institutions cannot continue the traditional “product pushing” business model and must transition to a more customer-centric model whereby they look to personalize their service offerings.
At the heart of this sea change is the ability of institutions to truly understand their end-customers. In addition, the tremendous cost of transitioning to digitized services also requires modular “build versus buy” solutions, where a close partnership with the solution provider to provide bespoke solutions will add value to the end-customers. To ensure successful integration of robo-advisory solutions into the existing product offering, financial institutions are now working with external digital solutions providers that have extensive knowledge in these areas to provide a comprehensive suite of products that can be integrated. Simply coined a “bank in a box” solution, this would seem a natural response to the necessity of implementing an integrated platform to ensure a digitally transformative, holistic service for wealth management end-customers.