What rules does ASIC make robo-advice providers follow?
New guidelines help ensure that computerised advisory services comply with financial regulations and keep consumers informed and safe.
The Australian Securities and Investment Commission (ASIC), which monitors the activities of all investment advisors in Australia, has issued its final guidelines for robo-advice providers, which use sophisticated computer algorithms to provide automated advice on investment portfolios for individuals.
Because robo-advisers don't rely on human interaction, they can charge much lower fees than a traditional investment advisor. ASIC sees them as playing a useful role in the future of investment. The guidelines note: "We think that digital advice has the potential to be a convenient and low-cost option for retail clients who may not otherwise seek advice."
However, robo-advice services have to comply with basic ASIC principles that ensure customers are fully informed about the investment strategies being used and the associated risks. Many of these rules are identical to those which apply to any investment advisor -- be upfront, disclose all fees and commissions, ensure customers realise investments may rise as well as fall, manage investment risks effectively -- but there are some tweaks that reflect the automated nature of robo-advice.
Some of the specific principles which robo-advice companies need to follow include:
- Ensuring that staff members for the company have at least a general understanding of how the algorithms used by the service work. "We do not expect all digital advice licensees to understand the specific computer coding of an algorithm—however, we expect your understanding to include having people within the business who understand the rationale, risks and rules behind the algorithms underpinning the digital advice," the guidelines note.
- Regularly monitoring and testing algorithms to see that they are meeting their goals and being adjusted to reflect any changes in relevant laws. All systems should be fully documented, and any changes made to systems must be noted going back at least seven years.
- Maintaining adequate IT systems, particularly with respect to ensuring privacy and security of all customer data and maintaining backups. Even if some of these tasks are outsourced to cloud service providers or offshore teams, the robo-advice provider is responsible for ensuring these systems are adequate.
- Making sure that customers are aware that the nature of the advice provided is clearly explained, including any limitations, and that customers for whom the advice might not be suitable are filtered out.
- Ensuring that at least one staff member meets the training and competency standards required for all Australian Financial Services (AFS) licensees.
Any robo-adviser operating in Australia needs to follow these principles. Always check that any robo-adviser you're considering has an AFS licence and meets your needs. To learn more about robo-advice services, check out our detailed guide.