Report on Digital Investment Advice

Technology has long played a central role in financial services innovation. It continues to do so today as many firms in the securities industry introduce new digital investment advice tools to assist in developing and managing investment portfolios. FINRA undertook a review of selected digital investment advice tools to assess these developments.

The observations and practices in this report are drawn from FINRA’s discussions with a range of financial services firms that provide or use digital investment advice tools, vendors and foreign securities regulators as well our regulatory experience. This report uses the term “financial services firms” to include both broker-dealers and investment advisers. The rules discussed in this report apply to broker-dealers. The effective practices we discuss are specifically intended for FINRA-registered firms, but may be valuable to financial professionals generally.

The adoption of digital investment advice tools has stimulated discussions about the role of financial professionals and the evolving relationship between financial intermediaries and their clients. What role will financial professionals play in conjunction with digital services in providing investment advice? To what degree will investors rely primarily on digital investment advice? How well can software know a client? Can the skill, knowledge and service provided by well-trained and ethical financial professionals be incorporated in software? Can that software provide sound personal advice, especially for clients with more complex advice needs?

Without venturing to answer these questions, what is clear is that the role technology plays in supporting investment advice to clients will increase at many securities firms.  With that in mind, FINRA issues this report to remind broker-dealers of their obligations under FINRA rules as well as to share effective practices related to digital investment advice, including with respect to technology management, portfolio development and conflicts of interest mitigation. The report also raises considerations for investors in evaluating investment advice derived entirely or in part from digital investment advice tools.

This report does not create any new legal requirements or change any existing broker-dealer regulatory obligations. Throughout the report, we identify practices that we believe firms should consider and tailor to their business model.

For Further Information

Inquiries regarding this report may be directed to  Steven Polansky, Senior Director, Regulatory Operations/Shared Services, at (202) 728 8331.