FINRA has issued a “Report on Digital Investment Advice” that includes several recommendations on how firms that operate robo platforms can ensure compliance with current laws and regulations. FINRA recommends a supervisory framework over the algorithms utilized including an assessment of the algorithm’s underlying assumptions, testing outputs, and ensuring expected results even as market conditions change. FINRA also recommends practices for customer profiling and suitability including identifying the necessary information elements, resolving conflicting responses, maintaining customer contact, testing for concentrations, and ensuring that the system does not inadvertently favor certain securities. FINRA also includes recommended practices for rebalancing, training and monitoring for conflicts of interest. FINRA issued the report “to remind broker-dealers of their obligations under FINRA rules as well as to share effective practices related to digital investment advice, including with respect to technology management, portfolio development and conflicts of interest mitigation.”
OUR TAKE: Robo-advisors and the firms that utilize them are now on regulatory notice that FINRA will be monitoring ongoing suitability, conflicts, and customer protection. We expect the SEC will ultimately follow with guidance of its own.