In response to the emerging growth and use of so-called “robo-advisors,” including coverage in the media, FINRA released a report in March 2016 relating to these digital investment tools. The full report may be found at the following link:

FINRA issued the report to remind broker-dealers of their obligations under FINRA rules in connection with these tools. The report is also designed to share practices related to digital investment advice that FINRA believes are effective, including as to technology management, portfolio development and conflicts of interest mitigation. The report also identifies practices that FINRA believes firms should consider and potentially adapt.

The report relates to both (a) tools directed for use by investors and (b) tools used by financial advisors in connection with their advice to customers.

Scope of Report

The report should be considered required reading for those firms and individuals that use one or more of these tools.

The report’s discussion and recommendations relate to, among other things:

  • the governance and supervision of the algorithms that underlie digital investment tools, including practices for adopting them and maintaining them;
  • selecting the components of model portfolios, and rebalancing these portfolios;
  • training financial advisors in using digital investment tools;
  • the role that financial advisors may (or may not) be playing when investors use these tools;
  • identifying and managing the conflicts of interest that can arise from using digital investment tools; and
  • applying “know your customer” considerations to digital investment tools.

Takeaways for Investors

A concluding section of the report is directed at investors. The report identifies a number of considerations for investors in evaluating investment advice derived from digital investment advice tools. In order to properly benefit from the investment advice they receive, they need to understand the investment approach and assumptions of any algorithm. They also need to understand the costs that result from any investment strategy, and that the conflicts of interest that arise may remain in connection with these tools.