Robo-advisers have surged in popularity as people seek low-cost, automated investment opportunities. In a worldwide forecast, the number of people to use robo-advisory services is estimated to reach 95.4M by 2021 compared to 5.7M estimated users in 20161. The millennial generation is an early adopter of robo-advisory services making up the largest client base in the US with 80 million investors2. The wealth industry is set to see trillions of dollars of wealth transfer from baby boomers to a new generation of digital natives, with a readiness to adopt new technologies through online channels. The use of messenger and video-calling applications such as FaceTime, WhatsApp and WeChat demonstrate the preference for more action to be taken online and the fading out of face-to-face meetings, paving the way forward for robo-advisers.
Across the APAC region digital growth has accelerated. The amount of people using the Internet is increasing 15% year-on-year, and has now passed the 1.9 billion mark. More than 1.5 billion people across APAC now use social media on a monthly basis, with 95% accessing their accounts via a mobile device3. This is the highest ratio in the world. Financial wealth management firms have tapped into this trend, and demographic niche markets are a key driving force behind the interest in robo-advisory services.
The Burnmark Digital Wealth Report issued in April 2017 compares the millennial population of various countries against an “investor’s digital readiness score”. It should be noted that Hong Kong has one of the smallest millennial populations (under 10 million), however obtained the highest digital readiness score. Baskar Prabhakara, co-founder and CEO of WeInvest expects robo-advisers to take at least 15% market share of APAC’s wealth management industry by 2025, while KMPG’s whitepaper “Robo Advising: Catching Up and Getting Ahead” published in 2015 projected a US$2.2 trillion value for robo advice – a growth rate of 68%.
With this in mind, the Securities and Futures Commission (“SFC”) issued a consultation paper “Proposed Guidelines on Online Distribution and Advisory Platforms” in May 2017, which sought the opinion and comments from members of the public with an interest and key market players on new guidelines aimed at investments undertaken online. Comments on the consultation paper are due back on 4 August 2017, at which point the SFC will introduce new guidelines under s399 of the Securities and Futures Ordinance (“SFO”).
While the SFC currently regulates and oversees offline investment transactions, there are limited regulations for online platforms offering a wide range of investment services. The consultation paper proposes guidelines for SFC-licensed or registered persons who conduct their regulated activities in providing order execution, distribution and advisory services in respect of investment products via online platforms (“Platform Operator”). Traditional offline sale processes typically see clients being guided through their investment options, with product features and associated risks explained by the intermediaries’ representative. One of the key aspects the SFC addresses in the consultation paper is for online investors to be given clear, easy to understand and unbiased literature regarding the product’s features, risks and potential returns.
The proposed guidelines will be in addition to the existing conduct requirements set out under the SFO and other ordinances in effect, the SFC proposes the following core principles:-
Clarification of whether the Suitability Requirement will be triggered is also set out in the consultation paper, with examples provided for various situations. The Suitability Requirement is stated under paragraph 5.2 of the Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission (“Code of Conduct”) as follows:-
“Having regard to information about the client of which the licensed or registered person is or should be aware through the exercise of due diligence, the licensed or registered person should, when making a recommendation or solicitation, ensure the suitability of the recommendation or solicitation for that client is reasonable in all the circumstances.”
The consultation paper notes that the posting of factual, fair and balanced product-specific materials would not in itself amount to a solicitation or recommendation and the Suitability Requirement would therefore not be triggered. However, it should be noted that the manner of presentation and content of product-specific materials posted via the online platform must be considered as to whether a solicitation or recommendation has taken place. For example, if the platform emphasises one investment product over another, or the platform publishes product-specific “Act Now!” or “Don’t Miss Out!” banners, the Suitability Requirement would be triggered. The consultation paper concludes that the provision of investment advice via an online platform will trigger the Suitability Requirement, which will also apply to any form of robo-advice.
Robo-advice is commonly investment advice provided by Platform Operators using automated portfolio construction or model portfolios based on a client’s personal preference, attitude to investment and circumstance. This type of Platform Operator is defined in the consultation paper as a “robo-adviser”. A typical robo-adviser collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invests client assets.
The SFC notes that there are a wide range of approaches when it comes to robo-advice, from goal-based advice (such as financial planning to purchase a property) to predefined model portfolios calibrated to a client’s risk category. The consultation paper outlines six area guidelines for robo-advisers, namely:-
More and more robo-advisers are looking to launch mobile applications to meet the demands of the millennial investor, whereby investors can manage their portfolios literally with the touch of a fingertip. The SFC’s consultation paper clearly outlines the need for robo-advisers to provide accurate, easily comprehensible information to investors. One of the SFC’s fundamental concerns seems to be the provision of information to an investor, going so far as giving examples of the use of a chatbox or pop-ups to highlight key information or warnings if, for instance, a change is made to the investor’s portfolio. It will be interesting to see how robo-advisers translate their comprehensive online platforms to mobile applications taking into consideration the requirements stipulated by the SFC.
Investors are demanding more from their financial advisers, expecting easy-to-use, technology-driven apps and platforms to manage their portfolios. As such, there is an opportunity for savvy robo-advisers to capture a large market share as millennials look to invest. The upcoming issuance of the Guidelines on Online Distribution and Advisory Platforms by the SFC will certainly shape how robo-advisers can expand their business operations, whilst taking into consideration the existing legislation, with particular reference to s103, s109 and s113, set out the SFO.
2. Source: Digital Wealth, Burnmark, April 2017
3. Source: Digital in 2017: Global Overview, we are social, 24 January 2017