Online financial advice tools, commonly referred to as robo-advisors, must be licenced by the Financial Services Board (FSB) in order to provide financial advice, says deputy executive officer for Financial Advisory and Intermediary Services (FAIS), Caroline da Silva.
Where robo-advice platforms are used directly by consumers, these platforms would either need to register as FSPs themselves or operate off an existing FSP’s licence, where there are key individuals behind the product responsible for ensuring that the advice is appropriate for customers, Da Silva explains.
“Even if robo-advice platforms are able to argue that they are not giving advice, the platform is still acting as an intermediary in facilitating a transaction between a client and a product provider and would need to be registered under FAIS to provide intermediary services,” she adds.
“Where a registered financial advisor uses robo-advice tools, they are responsible for the tools they use.”
Since robo-advice platforms are not yet widespread in South Africa, the FSB is still working on the detail in this area as robo-advisors “flesh themselves out”, notes Da Silva.
Locally, a number of online investment tools have recently been made available to consumers, including Galileo Capital’s SmartRand; Beanstalk; Anchor Capital-backed Bizank; and a soon-to-be-launched product from Sygnia.
Alexander Forbes Life has made an online financial planning tool, Figlo Advisor, available to its financial advisors in order to assist them in providing advice to customers.
“Consultants will still be responsible for the advice that they provide,” highlights Jaco Langner, MD of Alexander Forbes Life.
Similarly, the companies behind SmartRand, Beanstalk and Bizank are registered FSPs and are responsible for the investment advice provided by these tools, which means customers would have recourse against them in terms of the FAIS Act if they were not happy with the outcome of the advice received.
Asked why Bizank, which launched last week, explicitly notes on its website that it does not provide financial or investment advice, Anchor Capital CEO, Peter Armitage says it does not want to create an impression that it is providing users with a holistic financial plan that takes into account their entire asset base.
“That’s the role of a financial advisor. We are taking a pool of money and managing it on a discretionary basis,” he explains.
Bizank users give Anchor Capital the mandate to manage their money for them, bearing in mind their objectives, risk tolerance and time frame.
Users would still ultimately have recourse against Anchor Capital, as the registered FSP behind the platform.
Regulation likely to focus on outcomes
It appears that, for now at least, the FSB is comfortable with the idea of robo-advice as long as there is an FSP behind the product, which will be held responsible for the advice provided.
This may change, as the technology develops and becomes more prevalent, but recent regulatory developments – such as Treating Customers Fairly and the Retail Distribution Review – indicate that the FSB’s focus is squarely on customer outcomes.
By way of illustration, Da Silva says it is more likely to examine the competencies of key individuals in the firms behind robo-advice platforms, than, for example, the details of the algorithms behind the products.
In the US, the Financial Industry Regulatory Authority (Finra) has gone so far as to develop regulatory principles for the algorithms behind digital advice tools, insisting that firms should effectively “govern and supervise” the algorithms used, ensuring they are well designed and correctly coded.
The UK’s Financial Conduct Authority (FCA), on another hand, has given the nod to the use of robo-advice and developed a toolkit that firms can use to evaluate the effectiveness of automated advice tools.
Regardless of how regulation develops in this area locally, when considering investing via a robo-advisor, find out whether or not the company providing the advice is taking responsibility for that advice or leaving you to face the consequences of your investment decisions alone.
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