ROBO-INVESTING IN THE FUTURE
At its inception, only five stocks traded on the New York Stock Exchange (NYSE), which was created under the Buttonwood Agreement where 24 prominent asset managers came together to fix their commission prices and push out competitors.[1] Although the nature of financial securities has become increasingly complex, the relationship between asset managers and investors has remained largely unaltered.
However, traditional asset managers have recently come under threat by robo-advisers—online, automated, algorithm-based platforms that provide wealth management services without the need for human financial planners. Due to low barriers of entry and a costly fee structure, financial robo-advising companies, such as Acorns, could potentially reduce the need for asset managers in the future.[2] In short, Acorns users connect their credit card information, and now PayPal accounts, to the Acorns platform, which rounds up purchases and invests the difference in a diversified portfolio using a set of algorithms that determines, among other things, the investor’s risk level.
After spinning-off their lending division to Synchrony Bank, PayPal invested and partnered with Acorns to allow PayPal users to use its algorithm-based system on the PayPal platform.[3] The spin-off was likely structured as a sale of credit receivables, requiring the filing of a financing statement by Synchrony Bank to perfect its security interest in the sale. More importantly, PayPal appears to be shifting focus from the lending to the investment advisory space where robo-advising companies recently attracted the attention of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
The SEC views robo-advisers as no different than traditional asset managers. Robo-advisers fall under the purview of the Investment Adviser Act of 1940 (IAA), an archaic body of law that regulates, you guessed, investment advisors. The SEC recently issued a guidance on how robo-advising platforms can ensure compliance with the IAA, including disclosure requirements, the duty to provide suitable advice, and effective compliance programs to address particular concerns relevant to providing automated advice.[4] Overall, the SEC cautiously welcomes robo-advising services.
Dedicated to investor protection, FINRA recently advised robo-advisers for the need of sound governance and supervision of algorithms and effective means of overseeing suitability of recommendations, conflicts of interest, consumer risk profiles and portfolio rebalancing.[5] Like the SEC, FINRA has not created any additional requirements for the robo-advising space. Rather, both agencies seek to ensure that the algorithm-based platforms are able to comply with existing regulatory structures.
Although Acorns is a micro-investing platform, it is easy to see how the algorithm-based technology could negatively impact the role of asset managers.
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[1] https://www.gilderlehrman.org/history-by-era/economics/essays/rise-american-institution-stock-market