Need for change in robo-advisory guidelines

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The emergence of robo-advisory services has given the age-old business of managing other people’s money a technological makeover. This group of financial advisors provides advice based on digital algorithms or artificial intelligence (AI). Robotic advisors currently offer portfolio management and tax-loss harvesting as their primary services. The popularity of this algorithm-driven financial solution has zoomed in recent years.

That said, fintech firms are finding it increasingly difficult to offer low-cost investing advice via automated platforms to small-ticket retail investors, leading several large firms to abandon business plans in this space. If their activity is limited to financial planning and investment advising, Robo-advisers are subject to SEBI’s investment adviser regulations.

They would, however, be subject to SEBI’s portfolio manager requirements if they hold client assets or have the discretion to invest on their behalf. In their current state, the regulations obstruct robo-advisory services. Further, to complicate the matter, Sebi, in April 2021, provided informal recommendations requiring a physical investment advisory agreement.

Physical agreements are more expensive, take longer to acquire clients, and are less convenient than digital agreements. SEBI should permit digitally executed IA agreements. Similarly, all physical record execution/maintenance obligations in the IA regulations should be replaced with digital equivalents.

While the IA laws already allow for the electronic maintenance of records, they do not make it evident that the same can be done online (or in electronic form). For example, keeping a “signed” rationale for arriving at financial advice is a requirement that may not be practical or optimal for robo-advisory services.

In comparison to other online market services, such as selling mutual fund units and stocks, these fintech firms are obstructed by the requirement for physical agreement copies. Today India’s digital payments market is at an all-time high and growing constantly. Creating ideal conditions for the fintech industry to thrive should be a priority area.