HIGHLIGHTS OF THE SECURITIES AND EXCHANGE COMMISSION’S RULE ON ROBO-ADVISORY SERVICES

 

The average man in the society desires to make wealth sufficient for day-to-day living. Some people go further to invest their savings with a view to building wealth and securing some form of financial stability. In a bid to achieve this objective, these people employ the services of advisors who provide ongoing advice about buying, selling and/or holding investments and will monitor the performance of the investments and its alignment with the overall investment objectives. A Financial Advisor is a finance professional who provides consulting and advice about an individual’s or entity’s finances. Financial advisors can help individuals and companies reach their financial goals sooner by providing their clients with strategies and ways to create more wealth, reduce costs, or eliminate debts.[2] With the automation of the present economy came Robo Advisors.

Brief Overview of Robo Advisors

A Robo-advisor is a digital financial advisor that provides financial advice or manages investments with moderate to minimal human intervention. Robo-advisors are designed to deliver advice digitally based on inputs received from the investor.[3] A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client assets.[4]

The first Robo-advisors, which emerged in the wake of the financial crisis in 2008, succeeded by meeting the demand from younger consumers for technology that could provide financial advice and a cheaper way to start investing.[5] They were used as online interface to manage and balance client’s assets by financial managers and were made publicly available in 2008 for the first time to the general public who were in dire need to manage their assets personally.[6] As a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums, employing portfolio management algorithms,[7] they gather information on a client through an online survey and then automatically invest for the client based on that data. Robo-advisors often use passive index investing strategies.[8]

Employing the use of Robo-advisors has its benefits. Robo-advisors offer traditional investment management services at much lower fees than their human counterparts (financial advisors). The minimum amount required to use such types of software is also much lower than the minimum amount required by financial planners.[9] Robo-advisors also add value by allowing investors to invest in many different asset classes conveniently through mobile phones or web applications. Furthermore, they provide full access to portfolio management tools, which offer more flexibility and security to users.[10] Robo-advisors are also more accessible. They are available 24/7 as long as the user has an Internet connection.[11] Although Robo-advisors offer cheaper and faster investment management services than human advisors, they lack the subjectivity required to offer fully personalized services.[12] However, using a Robo-advisor will limit the options that you can make as an individual investor. You cannot choose which mutual funds or Exchange-Traded Funds (ETFs) you are invested in, and you cannot purchase individual stocks or bonds in your account.[13]

 

Securities and Exchange Commission (“SEC”) Regulation on Robo-advisors.

Robo-advisors hold the same legal status as human (Corporate and Individual) advisors. They must register with the Securities and Exchange Commission (SEC) to conduct business and are therefore subject to the same securities laws and regulations as traditional broker-dealers.[14]

The SEC recently released Rules on Robo-advisory services (“the Rules”)[15] and provides that the Rules will be applicable to all Capital Market Operators and persons (Individual & Corporate) offering or seeking to offer Digital (Robo) Advisory Services in the Nigerian Capital Market.[16]

The SEC distinguishes between Robo-advisors and Fully Automated Robo-advisors; accordingly, a Robo-advisor is a person who provides digital advisory services, and a Fully Automated Robo-advisor is a Robo-advisor with no human adviser intervention in the entire advisory process.[17] The SEC further provides that Digital (Robo) Advisers must be registered in compliance with the Rule on Corporate and Individual Advisers.[18][19]

Robo-advisors are required to provide sufficient information to their clients to enable them to make informed investment decisions. Disclosures shall be presented in plain English and in clear simple language.[20] Similarly, where a Robo-advisor outsources the development and maintenance of their client facing tools to a third-party provider, the third-party provider is not required to be registered by the Commission and the Robo-advisor shall nonetheless subject the third-party provider to appropriate due diligence processes in order to assess the risks associated with the outsourcing arrangement.[21]

Where a Robo-advisor also provides portfolio/fund management services to the client and the client decides on an alternative investment decision contrary to the recommendation of the Robo-advisor, the Robo-advisor shall rely on the client’s order and obtain a written decision/mandate from the client, highlighting in writing that the client is aware of their responsibility for the investment outcome and suitability of his/her investment decision.[22] The SEC provides for governance and supervision of Algorithms, hence, to safeguard the client-facing tools[23] which are primarily algorithm-driven, a Robo-advisor shall put in place adequate governance and supervisory arrangements to effectively mitigate against fault or bias in the algorithms. Also, the Board and Senior Management of the Robo-advisor shall be responsible for maintaining effective oversight and governance of the client- facing tool and ensure that there are sufficient resources to monitor and supervise the performance of algorithms. The SEC also requires that the Robo-advisor should be adequately staffed with persons who have the competency and expertise to develop and review the methodology of the algorithms and adequate training should be provided to all staff who use the client-facing tool.[24]

The SEC provides for rules on developing,[25] monitoring and testing client-facing tools, hence Robo-advisors shall have policies, procedures and controls in place to monitor and test the algorithms on a regular basis to ensure that they are performing as intended.[26] Similarly, Robo-advisors must comply with the Anti-Money Laundering and Combating the Financing of Terrorism Act,[27] and shall have in place adequate policies, procedures and controls to mitigate against money laundering and terrorism financing risks.[28]

 

Conclusion

With broadband penetration rising from less than 20% five years ago to more than 40% since May 2020, Nigeria’s information and communications technology sector is the fastest growing in the country, rising 6.31% in the first quarter of 2021.[29] Innovative tech companies have started seizing the opportunity to diversify into  Robo-advisory services,[30] thus the steps taken by the SEC in creating a regulatory environment for Robo-advisory services to ensure accountability and utmost responsibility is very auspicious.

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For further information on this article and area of law, please contact

Oreoluwa Adebayo at:

S. P. A. Ajibade & Co., Lagos

By telephone (+234 1 472 9890), fax (+234 1 4605092)

mobile (+234 809 790 4717, +234.810.318.8416)

or email (oadebayo@spaajibade.com)

www.spaajibade.com

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[1]     Oreoluwa Adebayo, Associate Corporate Finance & Capital Markets Department, SPA Ajibade & Co., Lagos, Nigeria.

[2]     Corporate Finance Institute, ‘What is a Financial Advisor’, available at https://corporatefinanceinstitute.com/resources/careers/jobs/financial-advisor/, accessed on 21/12/21.

[3]     Forbes Advisor, ‘What is a Robo- Advisor and how does it work?’, available at <https://www.forbes.com/advisor/in/investing/what-is-a-robo-advisor-and-how-does-it-work/>, accessed on 20/12/21.

[4]     Investopedia, ‘Robo Advisor’, available at <https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp>, accessed on 20/12/21.

[5]     Bai, ‘Robo-advisors keep evolving to growing’ available at < https://www.bai.org/banking-strategies/article-detail/robo-advisors-keep-evolving-to-keep-growing/>, accessed on 21/12/21.

[6]     Wikipedia, ‘Robo-advisor’, available at <https://en.wikipedia.org/wiki/Robo-advisor#:~:text=assets%20under%20management-,History,client’s%20assets%20by%20financial%20managers.>, accessed on 21/12/21.

[7]     Schueffel, Patrick (2017). The Concise Fintech Compendium. Fribourg: School of Management Fribourg/Switzerland. p. 26.

[8]     Supra, n. 4.

[9]     Corporate Finance Institute, ‘Robo-advisors’, available at https://corporatefinanceinstitute.com/ resources/knowledge/trading-investing/robo-advisors/, accessed on 21/12/21.

[10]    Ibid.

[11]    Supra, n. 4.

[12]    Supra, n. 9.

[13]    Ibid.

[14]    Supra, n. 4.

[15]    SEC Nigeria, ‘New Rules, Major and Sundry Amendments to the Rules and Regulations of the Commission’, available at < https://sec.gov.ng/wp-content/uploads/2021/09/New-Rules-and-Amendments-_Executed-30-August-2021.pdf>, accessed on 21/12/21.

[16]    Ibid at Rule 1.

[17]    Ibid.

[18]    See SEC, ‘Rules and Regulations Pursuant to Investment and Securities Act of 1999’, available at: <https://www.nigerianlawguru.com/legislations/RULES/S.E.C%20RULES.pdf>, accessed on 21/12/21.

[19]    See SEC Nigeria, ‘Requirement for Registration as Corporate Investment Adviser’ available at <https://sec.gov.ng/check-lists/requirement-for-registration-as-corporate-investment-adviser/>, accessed on 21/12/21.

[20]    Supra, n. 15 at Rule 11.

[21]    Supra, n. 15 at Rule 3.

[22]    Ibid.

[23]    Client facing tools include hardware, software or technology with user interfaces (UI) or applications that directly interact with customers.

[24]    Supra, n. 15 at Rule 6.

[25]    Supra, n.15 at Rule 7.

[26]    Supra, n. 15 at Rule 8.

[27]    Central Bank of Nigeria (Anti-Money Laundering and Combating Financing of Terrorism for Banks and Other Financial Institutions in Nigeria), Regulations, 2013, available at <  https://www.cbn.gov.ng/out/2014/fprd/aml%20act%202013.pdf>, accessed on 21/12/21.

[28]    Supra, n 15 at Rule 10.

[29]    Mail & Guardian, ‘Nigeria’s tech community was booming. Now it’s in shock’, available at

<https://mg.co.za/africa/2021-06-14-nigerias-tech-community-was-booming-now-its-in-shock/>, accessed on 21/12/21.

[30]    Disrupt Africa, ‘Nigerian startup launches crypto investment robo-advisor’, available at

<https://disrupt-africa.com/2021/08/27/nigerian-startup-launches-crypto-investment-robo-advisor/>, accessed on 21/12/21.