FINRA Issues Best Practices for Robo Advisors

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digital brokersRobots will manage assets worth almost $500 billion by 2020.

And since 2020 isn’t far, the Financial Industry Regulatory Authority (FINRA) has turned its attention towards the robo advisory industry and issued best practices for firms offering digital tools for wealth management.

Although companies are not legally bound to follow them, the regulator’s advisory guidelines outline regulatory principles in areas crucial to the business of digital investment advice.


FINRA suggested firms supervise and govern algorithms used in robo tools meticulously. “At the most basic level, firms should assess whether an algorithm is consistent with the firm’s investment and analytic approaches,” the report said.

Portfolios & Conflict of Interest

Manual approvals and supervision of portfolios proposed by tools is key. The report suggested that companies monitor the pre-packaged portfolios and assess its appropriateness for different investors. Herein, FINRA recommended customer profiling based on risk capacity and risk willingness.


FINRA’s effective practices for automatic rebalancing recommended establishing customer intent on automatic rebalancing, disclosing to customers how the rebalancing works and apprising the customer of the potential cost and tax implications of the rebalancing.


Robots are not fully infallible yet and the regulator endorsed training professionals on permitted use of digital tools, being fully aware of its assumptions and limitations and judging its suitability for a client accordingly.

Full report available here

Last modified: April 20, 2019

Category: Regulation

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