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Robo-advisors must be licenced, says FSB

Regulator provides clarity on digital advice platforms.
Peter Armitage of Anchor Capital notes that Bizank is an investment tool rather than a financial advisor.

JOHANNESBURG – 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.

COMMENTS   6

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Hanna, interesting article. Is Bizank giving advice per FAIS and is it complying with FAIS?

Hi stevenn, thanks for the comment and huge apologies for not replying sooner, I’ve only just seen it. Yes, according to Anchor Capital, Bizank is FAIS-compliant.

C-3PO: I-recommend-that-you-take-out-a- life-insurance-retirement-annuity-what-do-you-think-of-that?
Client: Take me to your leader.

Well done on this article Hanna, it’s a subject that needs far more attention. It’s good that Caroline da Silva has made these statements but the FSB should’ve laid down the rules before the first robo-adviser hit the market. Every single FAIS requirement needed by human advisers should also be required of robo-advisers and it’s troubling that Bizank are now operational and claiming that they don’t give advice. As with the awarding of category 1 and 2 licences by the FSB, it’s too easy to enter this industry and usually a response comes from the regulator once damage has already been done.

Robo-advisers are basically a great opportunity for product-pushers to make money and if you look at Smartrand or Bizank, they’re basically “tied advisers” who are offering “free/cheap advice” to push investors into their own products, or products where they have a vested interest. These products are quite limited and in many cases very mediocre. So no investor is getting truly “independent” advice, they’re being lured into a product portfolio to the ultimate benefit of the firms behind the robo-advisers.

The FSB have a significant budget for investor education and they should see to it that basic financial advice should be freely available to the masses. It happens in other countries and it’s about as “independent” as advice can be. The more that advice is independent of product, the better for the investing public!

More inane thinking from the FSB. When will regulators learn (I) that they can’t keep up with technological change and shouldn’t try (ii) you can’t protect investors from their own stupidity. Any client who follows recommendations without confirmation from a flesh and blood person deserves whatever misfortune then follows.
FSB – step away. You can’t even manage your existing empire.

@Green Jacket – Fully agreed… and you are spot-on about the product-pushing, however we should arguably not be naïve in having expected corporates to have any other motive? I would also merely become fearful of any agency making investment/retirement recommendations, lest we all end up being placed in government bonds (as per recently advertised retail savings bonds schemes, which interesting were “guaranteed”, of course).

@buckie – don’t be such a technophobe! 😉 You sound like a typical threatened/ endangered IFA… we all need to be a touch more constructive with our critique if we wish to maintain credibility in this debate, wouldn’t you say?

End of comments.

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