The SEC needs to adapt and close gaps in its regulations as the retail advice industry becomes more reliant on technology to serve clients, Michael Kitces, co-founder of XY Planning Network, told the agency Wednesday.

With the massive growth of technology and with fee-based advisors using the same technology platforms as robo-advisors, those in the advice business continue to be regulated as if they are transactional, he said. “Regulators are simply not moderating [or monitoring] it,” Kitces said at the SEC’s Asset Management Advisory Committee Meeting.

“There is so much interest in financial planning, what you're seeing are people going from the historical transaction business into the advice business, but they’re still being regulated in the transactional channels,” Kitces said.

Advisors and platforms in the advice business are offering wholesale delegation but don’t necessarily have additional standards attached to the fact that no one is overseeing or monitoring the advice that technology and algorithms create, Kitces said.

“I’d argue we even need a different thinking around what the standards are when a client actually goes into the delegation business versus just the advice business, where they still have the choice not to implement the advice,” Kitces argued.

There are additional complexities and conflicts of interest that come into play when the client can’t say no “because they’ve already delegated the yes,” he added.

The concern for regulators should be that investors who chose robotic-type investing—either through a human advisor or robot—is that they are “not even moderating [monitoring their portfolio] on an ongoing basis. They have to trust the technology and the robo-advisor that they’re doing the right thing,” Kitces said.

In situations where decisions are delegated, “advisor standards need to be higher,” he said.

The CFP Board of standards added a due diligence standard for CFP certificants, requiring them to vet their own technology before they use it for investment management decisions, Kitces noted.

The more advisors defer to technology for investment decisions, the more important oversight is, he argued. The average advisor today only spends about 11% of their time on investment issues, he said, citing XYPN advisor surveys. “Technology has almost entirely eliminated the investment activity from the business of the investment advisor,” he said.

“Where you get to the point where you’re not just in the advice business, you’re in the management business, I do think the standards arguable need to be higher," he added. “Once you’re in the management business of an advisor especially a robo advisor, you run for the risk at the extreme of using algorithms gone haywire en masse. If someone doesn’t have controls in place you can do harm at scale instead of doing personalization at scale."

As with other technologies, the robo-advice industry is not infallible, he said.

“Those that run this type of business have a lot of controls in place for oversight, but clearly at some point someone will do this not well with no controls, so I think it raises good regulatory questions about what controls should be expected,” he said.

That risk of what can go wrong has to be on the mind of most RIAs and broker-dealers today, Kitces said. While 95% of the advisors at XYPN have an E&O policy, only one has had a claim, and that was for an advisor who was doing a blend of advice and investment management and had a trader on staff, he said. “It was unrelated to the advice or the technology he was using. It was a good, old-fashioned, fat-fingered trade for a client in something that was very volatile,” Kitces said.

Kitces said he is also concerned that firms not custodying assets can escape federal regulation.

“We’ve added almost 1,500 advisors and 1,350 RIAs in the past seven years and almost 95% of them, because their business is entirely focused on giving pure financial planning advice, are state registered. They don’t manage assets, so they will never appear on the federal regulatory radar screen,” he said.

“We’re in an environment where if I wanted to offer a stand-alone technology firm to do investment management, I could now do it at the state level, and as long as I’m not actually selling any products, I’m not subject to any regulator because the regulation only attaches to the products that are implemented and not the advice itself,” Kitces said.

Kitces concluded that “in practice, state securities regulators are becoming the net at the bottom that catches everything else that is slipping through with the caveat that not every state is interpreting things the same way, so the result is there is now an immense amount of variability in the regulation of financial planning at the state level,."