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.