Technology — and Oversight of it — in Fiduciary Rule’s Wake

The release of a new federal regulation can create a virtual cottage industry, not to mention further regulation to address its ripple effects, and the impending release of the Department of Labor’s (DOL) fiduciary rule is no exception. The release of the rule could spur the development and use of new technology. But that’s not all — it appears that very technology itself will evoke fresh oversight of the technology intended to help with compliance. Quite the circle.

Cerulli Associates predicts that with the rule's implementation, new technological features and products will arise, reports InvestmentNews. Cerulli cites several companies that are either developing or already offering technology broker-dealers, advisers and other firms can use.

In addition, InvestmentNews says, technological features that assist with risk assessment will become more important for advisers. It reports that there are technology providers and broker-dealers that already have developed technology to help with risk assessment.

But opportunity for one is also opportunity for another. So it’s no surprise that the Financial Industry Regulatory Authority (FINRA) has promised to pay attention to investment advice that arises from use of software. In fact, FINRA has wasted no time and on March 15 issued guidance for broker-dealers on digital investment advice.

“Financial services firms’ offerings of digital investment advice need sound governance and supervision, including effective means of overseeing suitability of recommendations, conflicts of interest, customer risk profiles and portfolio rebalancing,” said FINRA in a news release.

   In “Report on Digital Investment Advice,” FINRA argues that training and education are crucial for financial professionals who use digital investment advice tools.

The report outlines regulatory principles and effective practices in the following areas:

• governance and supervision of algorithms;

• customer profiling;

• governance and supervision of portfolios and conflicts of interest;

• rebalancing; 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 client.

The report shares effective practices related to digital investment advice services, reminds member firms of their obligations under FINRA rules, notes that global spending on digital wealth management services is expected to increase significantly and outlines lessons and suggestions for investors.