Why Regulators are Ratcheting Up on Robo Advisors
Riding a decade-long bull market, robo advisory firms have proved investors are willing to let complex and proprietary algorithms be at the heart of their investment advice. Assets under management at digital platforms are expected to top $1 trillion in the next few years.
With increased market share comes greater scrutiny from regulators. Globally, regulators are ratcheting up on digital platforms, after giving them ample room to develop in the years before. Take the cases of WealthFront and Hedgeable in December 2018, in which regulators showed that they are not only willing and able to dissect even the most complicated algorithms but that they are also ready to hand out penalties to companies that are not in line with applicable market regulations.
One of the troubles of robo advisors lies in how algorithms synthesize millions of data points to suggest suitable products. These data points can be external, such as local, regional or supranational financial market regulation. They can also refer to internal policies, however, adding substantial complexities. Synthesizing and aggregating all of these compliance requirements is a formidable challenge to robo advisors. This is especially the case because the digital nature of robo advisors asks for a digital management of compliance, too.
With increasing regulatory complexity comes the tendency to keep business small. This might include the decision not to expand into new territories but may also come down to not offering the broadest possible product universe. While the first point is mostly to the deficiency of the provider, the latter point can have very serious consequences for clients. With a limited product universe usually come sub-optimal returns.
These, in our view, are the most important challenges for robo advisors as regulators are putting them onto increased scrutiny:
- Access to digital compliance rules
- Dependable aggregation of compliance rules across relevant jurisdictions
- Ability to mix external requirements with in-house policies
- To expand into new territories despite regulatory complexities
- Offering clients the largest possible product universe
- Empowering compliance by design wherever possible
To us at Apiax, the last point is an especially important one. Robo advisors need to be able to synthesize and aggregate all the regulatory requirements applicable to them. And they need to be able to do so in a binary, machine-readable format. This, then, is the key to make sure that their processes are compliant by design, which means that they are always able to check for compliance requirements in their processes, automatically. In a world of automatic onboarding and investing, compliance by design is the logical next step.
If you would like to learn more about how Apiax can support robo advisors, head over to our website.
