Financial firms eager to get in on the robo-advisor revolution might first need to take a deep breath.
Financial technology, or fintech, is transforming the financial services industry, writes BlackRock in “Digital Investment Advice: Robo Advisors Come of Age,” a recently published whitepaper. But there are few best practices for regulators or early adoptees to follow.
That may be because the technology itself is changing so quickly that it is difficult to pace the proliferation of robo-advisors.
“It’s an exciting time because there’s so much innovation and we think we’re still in the early days,” says Bo Lu, one of the paper’s co-authors. “We think that the innovation is going to accelerate, but that has implications for regulators and also for firms trying to keep up with the pace of change.”
Lu is CEO of Future Advisor, a robo-advisor purchased by BlackRock last year that now manages $937 million in client assets.
BlackRock believes the recent and rapid growth of digital advisors requires greater regulatory scrutiny and a more focused analysis of their business models and activities.
BlackRock has identified five areas of concern for digital advice providers and firms considering implementing a robo-advisor: suitability, algorithm design, disclosure standards, trading practices and cybersecurity.
Robo-advisors must be able to make suitable investment recommendations based on their knowledge of a client’s circumstances and goals. Currently, advisors use simple, short questionnaires to determine a person’s investment goals and risk tolerance.
Lu says that advisors must balance the need for more personalized, customized investment approaches with software design limitations — if users are presented with too many questions or too many options prior to investing, they’re unlikely to continue the process,
“It’s not necessary to have a longer and more detailed questionnaire to onboard a client,” Lu says. “It should be a fun experience. Try to get as many people as are interested through the process while making sure you don’t offer anything unsuitable.”