FINRA Says Know Your Algorithms, or Risk Liability

The new FINRA report on digital investment advice makes it clear: If an advisor or broker is using a risk survey that maps to a model portfolio—be it a managed account or robo advisor technology for advisors— they should assess whether the algorithm is consistent with the firm’s investment process. Otherwise, they’re taking on the risk that the solution is not suitable.

If you are using someone else’s code or algorithms to onboard your clients and invest their money—without having the ability to interject yourself into the situation—you’re assuming a high degree of liability since you cannot attest to the suitability of that investment. You’re taking at face value that the algorithms are accurate.

That said—if you can demonstrate that you truly understand the investment process that is happening under the hood of this technology and can adequately discuss the offerings provided by the solution while demonstrating due-diligence, then there should be no problem. Given the complex nature of these models, this would likely require an outside consultant or the advisory firm hiring an in-house technology expert, which may be expensive or onerous.

Read more here.

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