FINRA issued a report on effective practices related to digital investment advice services, in which it reminded member firms of their obligations under FINRA rules. The report outlines regulatory principles and effective practices in five key areas:

  • Governance and supervision of algorithms, including initially assessing the methodology of digital tools and the quality and reliability of data inputs, as well as ongoing evaluation such as testing the tools to ensure they are performing as expected, and determining whether models used by a tool remain appropriate as market conditions change;
  • Customer profiling, including assessing both a customer’s risk capacity and risk willingness, and addressing contradictory or inconsistent responses in customer-provided information;
  • Governance and supervision of portfolios and conflicts of interest, including determining the risk, return and diversification characteristics of a portfolio that is suitable for a given investor profile, and mitigating (through avoidance or disclosure) conflicts that can arise through the selection of securities for a portfolio;
  • Rebalancing, including providing descriptions of how the rebalancing works and procedures that define how the tools will act in the event of a major market movement; and
  • Training that enables financial professionals to understand the key assumptions and limitations of individual digital investment advice tools, and determine when use of a tool may not be appropriate for a customer.