(Bloomberg) -- BlackRock urged regulators to increase scrutiny of robo advisers as customers flock to automated services, lured by low fees and ease of use.
Regulators should ensure digital advisers understand their customers before offering such services and provide clear disclosure on the algorithms used to recommend securities, the New York-based company said in a report released Monday. They should also analyze fee disclosures and how the firms protect client data and prevent cyber breaches, BlackRock said.
“If you as an individual signed up for digital advice and tried three different products, you will get three different answers,” BlackRock Vice Chairwoman Barbara Novick said Friday. “There are no standards or rules of the road on these things, so you either need disclosure that establishes what are the rules or advice on best practices, but these should be up for discussion.”
Blockbuster industry deals and unforeseen shifts in client attitudes are altering future forecasts for digital advice.
Firms including BlackRock, the world’s largest asset manager, have added computer-generated advice platforms to win over millennials and new investors and gain market share against rivals. Last year, Vanguard and Charles Schwab started automated services and this year Fidelity Investments established a version with first-time investors in mind.
Robo advisers often put investors in ETFs, which BlackRock is a leading provider of. The programs periodically buy and sell securities for customers automatically and some also try to minimize the tax on investment gains.
While digital advice is subject to existing investment industry rules, the report delves into issues emerging with technology that haven’t traditionally been a part of the adviser business, Novick said.
Regulators in the U.S., Europe and Asia have begun to examine computer-generated investment offerings. The SEC and FINRA issued a joint alert in May 2015, which cautioned investors on automated investment tools and promises of better performance. In April, Massachusetts’ chief securities regulator, William Galvin, challenged robots’ role as investment advisers and said his office plans to evaluate those seeking registration in the state more closely to make sure they know their customers well.
BlackRock bought FutureAdvisor, a digital wealth manager, last year to help the broker-dealers and wealth managers it works with increase the number of clients they can serve and make them more efficient. The company’s ETFs are also included in competitors’ robo advisers’ offerings. Legg Mason followed BlackRock’s approach last month by acquiring Financial Guard.
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"We see a narrowing of players," says Alois Pirker, research director for Aite Group's Wealth Management practice.
August 31 -
The fifth-biggest bank in the U.S. strikes deal with BlackRock’s FutureAdvisor to offer automated investing service.
August 24 -
A younger adviser sees the benefits in working side-by-side with technology.
August 8
The field was pioneered by startups such as Wealthfront of Silicon Valley and Betterment of New York. Much of the new growth is now being grabbed by traditional giants in money management.
The technology behind robo advisers has enabled companies to offer investment advice to a bigger group of people at lower investment minimums and costs. The fees they charge are generally a third or less of what traditional wealth managers charge, or typically 1% of clients’ assets. That’s in part why the market for digitally based advice is projected to grow to at least $285 billion by 2017, according to researcher Aite Group.
“We believe that this is going to be a major component of the wealth management landscape in the future,” said Tom Fortin, head of retail technology at BlackRock.
