It’s easy to see how fintech is transforming the advice industry.
What’s not so easy is figuring out how regulators will continue to respond to the disruption. So far, there have been small moves like the OSC’s creation of its Fintech Advisory Committee and the OSC LaunchPad, both unveiled in late 2016. Previous to that, CSA put out a notice in 2015 that offered tips to firms that are registered as portfolio managers and that want to use online tools.
More clarity is needed on how fintech should be used, but that will take time. Why? Regulators want to do better than a Band-Aid solution for separately overseeing traditional advisors and digital wealth managers.
Kendra Thompson, Toronto-based managing director of Accenture Wealth Management (global lead), says their goal is to “lay the regulatory groundwork for convergence”—also known as hybrid advice—so regulators are prepared for an environment where traditional advisors use robo- and client-facing technology, potentially cutting down on in-person KYC and portfolio updates. “And that’s a big job.”
Sean Sadler, partner at McCarthy Tetrault LLP in Toronto, says wherever regulation affects client interaction, the rules must “adjust and adapt as [human] activity advances and modifies.” But there are roadblocks: “in some ways, [new models] will deliver up great successes—perhaps reasonably good investment returns for lower price points—but I’ll be surprised if there aren’t any unintended consequences,” or cases where rules “don’t adequately police risks.”
Already, robos and traditional advisors are partnering to serve clients, but it’s unclear how this will play out going forward. Will there be one integrated service model, or will each party exist as a separate entity connected through referral or cross-selling? Regulators suggest that different types of firms are likely to integrate their models. If that happens, firms will need to be aware of all regulations that apply to their activities.
Hard to compare robos and advisors
So far, traditional firms and robo-advisors are held to the same rules for interaction, licensing and products, says Thompson.
As CSA highlights in its 2015 notice to firms registered as portfolio managers , “The rules are the same if a PM operates under the traditional model of interacting with clients face-to-face and if a PM uses an online platform.”
CSA also permits hybrid models that leverage digital tools like online KYC forms. But, before a portfolio management firm can use the tools, the regulator first requires “substantial documentation” proving the firm and its employees will fully comply with the registration obligations under NI 31-103—especially if the firm’s proposed service model differs from current robo models.
The 2015 notice shows regulatory standards vary depending on the services a firm provides (e.g., transactional or full-service), not on whether a firm defines itself as online or traditional.
That could change. Says Sadler: “Five years from now, the OSC and industry will have had enough experience to understand how the online advisory model works [and] where it doesn’t work well,” possibly leading to “new subset rules that are applicable in a unique way to online advisors.”
But for now, typical Canadian robos are held to a fiduciary standard, says Randy Cass, founder of robo-advisor Nest Wealth. He equates digital managers with provincially registered discretionary human managers, noting, “We are both under a statutory fiduciary duty,” and no special treatment has been given to robos.
That said, robo-advisors are predominantly transactional, says Thompson. So they’re mainly held to guidelines on the product side—as opposed to additional client interaction and disclosure rules that apply to traditional advisors who may offer tax advice, estate planning and other services.
What about investor protection?
Earlier this year, Canadian robo-advisors started seeking approval to register new clients online without having to speak with them. At that time, both Nest Wealth and Wealthsimple were working with OSC to develop online systems that would eliminate the need for one-on-one conversations during onboarding. (Regulators confirm that the so-called no-call model has existed for several years.)
Yet some robo-advisors are leaning toward full service by adding new offerings for higher-income clients. Wealthsimple Black, for instance, offers advice and tax help for wealthy clients. And more traditional advisory firms are partnering with robos.
In either case, this question must be answered: Who holds liability for errors made by robos?
Currently, regulators determine fault by figuring out whether or not everyone involved (e.g., the client, advisor, firm and any third parties) followed the rules. And Sadler predicts the same kind of process will be in place for robos.
To sort out liability in the new tech-enabled service model, he says, you could ask: Did the client do a lousy job in responding to information inputs? Did the algorithm have a glitch in it that couldn’t work this combination of data out properly? Or did the advisor use the wrong algorithm, or use it improperly?
Experts say there needs to be a scalable regulatory framework that not only sets out how hybrid and online-only firms should interact with clients, but that also lays out how to deal with disputes. Until then, it’s unclear who’s accountable if the technology fails.