The Anatomy of a Robo-Adviser: One Glove Does Not Fit All

By Majda Muhic & Qudsia Shafiq, Spring 2017 IAC Student Interns

While commonly referred to as “robo-advisers,” they are also known by different names. The SEC has referred to robo-advisers as “automated investment tools.” FINRA refers to them as “digital investment advice tools” or “digital investment tools.” FINRA breaks down digital investment tools into two categories: “financial professional-facing” tools (tools that financial professionals use) and “client-facing tools” (tools that clients use.) “Client-facing tools” are referred to as tools that manage an investor’s portfolio by offering on or more of the following services:

  • customer profiling,
  • asset allocation,
  • portfolio selection,
  • trade execution,
  • portfolio rebalancing, and
  • tax-loss harvesting.

Each one of these services can be offered individually, but any combination of one or more of these six activities are referred to as “robo-advisers” or “robos” by FINRA. Learn more about each service below:

  • Customer Profiling – This term is used by FINRA to describe FINRA’s Suitability Rule (FINRA Rule 2111) and Know Your Customer Rule (FINRA Rule 2090). Together, these rules require firms (as well as brokers, financial advisers and financial consultants) to have a “reasonable basis to believe” that a particular transaction or overall investment strategy is appropriate for the investor. This reasonable belief can only be formed after the firm, broker, financial adviser or financial consultant gather at least 9 key pieces of information, to create a customer investment profile, ensuring that the client gets the investment advice best tailored to fit their needs. Click here for more information.
  • Asset Allocation – This (asset allocation) is the percentage of your total portfolio that you invest in different asset classes, like stocks, bonds, cash or cash equivalents. Financial services companies will adjust your asset mix based on assessments of the current market environment.
  • Portfolio Selection – The portfolio(s) a robo-adviser compiles is based on the robo-adviser’s view of client’s risk tolerance and robo-adviser’s approach to investing (It may use a passive, index-based approach to investing, common based on Modern Porfolio Theory or it may incorporate actively managing the investment portfolios).
  • Trade Execution – The process of filling the order after the broker has placed an order to buy or sell stock. Read more here.
  • Portfolio Rebalancing – The process of changing your portfolio back to the original asset allocation mix. Learn about the different ways you can rebalance your portfolio according to the SEC here and FINRA here.
  • Tax-Loss Harvesting – This is typically a tax deferral strategy where any losses on investments are used to offset and reduce taxes on investment gains.

As you can see, these are all important components of an investment account. Before selecting a robo-adviser, it’s important to know about each of the six services as each service can be performed on a spectrum: on a scale from 0, where the company does not offer the service at all, to 100, where the company takes full responsibility for actively managing and providing the full service. Even if you have already selected a robo-adviser, it is helpful to know the different services your company is offering to ensure that you are fully informed and satisfied.

 

The Anatomy of a Robo-Adviser: Part Robot, Part Adviser, Part…You?

By Majda Muhic & Qudsia Shafiq, Spring 2017 IAC Student Interns

Robo-advisers, like all other products, come in many different shapes and sizes. The SEC acknowledges that “robo-advisers operate under a wide variety of business models and provide a range of advisory services,” and provides multiple examples of how robo-advisers may vary:

  1. Robo-advisers are based on different business models.

“Some robo-advisers operate as stand-alone companies, while others are business units of larger, traditional investment advisers.”

  1. Robo-advisers can offer varying levels of human interaction to their clients.

“Some robo-advisers provide investment advice directly to the client with limited, if any, direct human interaction between the client and investment advisory personnel. For other robo-advisers, advice is provided by investment advisory personnel using the interactive platform to generate an investment plan that is discussed and refined with the client.”

  1. Robo-advisers may use a range of methods to collect information from their clients. “Many robo-advisers rely solely on questionnaires of varying lengths to obtain information from their clients. Other robo-advisers obtain additional information through direct client contact or by allowing clients to provide information with regard to their other accounts.”
  1. Robo-advisers vary in the method they use to deliver services to their clients.

“Some robo-advisers enable clients to access their services directly. Other robo-advisers are offered as digital portfolio management tools by traditional advisers that view these programs as components of their existing advisory practices.”

Why is this important? Depending on which robo-adviser you’ve chosen, it is important to know how much of that service is being controlled by a robot (which is most likely some form of technology using an algorithm-based program), a (human) adviser (which may or may not exist, depending on the company), and you (the investor, who may elect a hands-on or hands-off approach to controlling your investments). This way, you understand both your and your robo-adviser’s role in your investment and there aren’t any unexpected surprises when something goes awry.   In fact, because the business models can vary significantly from one company to another, it’s easy for clients to be confused about the role of their particular robo-adviser. Thus, the SEC emphasizes that proper disclosures of the robo-adviser’s workings are key.

On Robo-Advisers: Investment Advice a Single Swipe Away

By Majda Muhic & Qudsia Shafiq, Spring 2017 IAC Student Interns

With a single swipe of a mobile screen or a simple click of a mouse, an investor today can access a range of automated investment tools, including robo-advisers – investment management programs that select and manage individual investment portfolios. These algorithm-driven digital tools provide investment advisory services to consumer often without any human-to-human interaction. They promise low cost, ease of use, and broad access – they’re in your pocket on your cell phone, a gesture away.

Over the last year, the use of robo-advisers has grown rapidly and expanded beyond the initial market base of millennials to individuals from all walks of life.  In response to this rapid growth and the unique issues raised by automated investment advice, in February this year, the SEC issued a series of publications focusing exclusively on these innovative investment creatures: a Guidance Update for investment advisers and an Investor Bulleting for investors.  As the SEC Acting Chairman Michael Piowwar pointed out in February’s Press Release, technological innovation is rapidly changing the financial services industry and regulators are seeking to both “give thoughtful guidance to market participants” and “help investors tap into the opportunities that fintech innovation can provide while ensuring fairness and investor protection.”

The issued Guidance sets forth some of the key legal challenges facing investment advisers who have incorporated automated investment advice into their workflow and provides suggestions on how to meet their legal obligations under current law. The accompanying Investor Bulletin on the other hand identifies potential pitfalls of these apparently simple tools from the perspective of an investor and provides tips on how to navigate this new technological landscape. Both publications followed the Commission’s Fintech Forum held Nov. 14, 2016 examining innovation in the financial services industry. The Forum included a panel discussion focusing exclusively on robo-advisers and their impact on investors.

Considering the recent buzz surrounding the unique issues raised by automated investment advice, this blog series examines the nature of robo-advisers, the key legal issues raised by their use, essential tips for investors using automatic investment services, and some of the pros and cons of automated investment advice.

Becoming More Comfortable in my Lawyerly Skin

By Majda Muhic, Spring 2017 Student Intern

I returned to the Clinic for a second semester looking forward to deepening some of the knowledge I’d gained in the previous semester and becoming more comfortable in my lawyerly skin.  As I leave only a few months later, I realize that the Clinic has given me both – and much more.

Over the course of this second semester, I negotiated on behalf of a client with seasoned attorneys on the other side, drafted multiple demand letters, edited and re-edited agreements, and conducted an in-depth evaluation of a potential case. This evaluation taught me not only about possible legal claims harmed investors may bring against their brokers but also about the – at times frustrating and at times exhilarating – mental acrobatics of identifying legal claims in light of real-life factual scenarios. While this exercise resembled a legal writing course, it was real and taught me a lot more about what lawyers actually do – about the inevitable judgment calls lawyers must make in face of factual uncertainties that ultimately affect real people and their lives.

Over the course of the semester, I also had the opportunity to assist the Georgia Secretary of State Securities Division with investigating an investor complaint and with researching the cutting-edge issue of regulating robo-advisors. This regulatory perspective complemented the advocacy angle of my other Clinic work and provided a glimpse in how the different pieces of the legal system puzzle work together to define and enforce the law.  I used this knowledge to draft a comment letter on behalf of the Clinic and its clients in response to a proposal by FINRA to change one of its rules. The impact of our work at the Clinic is felt far beyond the insular walls of the school, and I am grateful for the opportunity to be a part of this effort.

I am probably most grateful for the relationships I have formed working with my teammates – for getting to work closely with other student interns who I now get to call not only colleagues but also friends.  The Clinic taught me about the value of open communication and collaboration for both effective legal practice and learning. Neither the amount and quality of the work we all did together nor the depth of our learning would have been possible without the supporting environment we all worked together to create.  I feel infinitely more prepared to embark on the next step of my legal journey and enter the legal profession in the fall than I did before joining the Clinic last August – and for this I am truly grateful.

Medical Student Perspective VI

My name is Melina Zúniga, and I am a fourth-year medical student at Morehouse School of Medicine and am originally from California. I first heard of the Health Law Partnership (HeLP) Legal Services Clinic from my resident during my pediatric rotation. We had a child patient with a complex medical history that affected all systems of her body. Given her family’s financial situation, she had difficulty paying for all the specialists she required. My resident, an alum of the Law and Medicine elective, recommended the HeLP Clinic to our patient for legal advice as to how to apply for disability benefits. It was then I discovered that Law and Medicine was an elective course during which fourth-year medical students work alongside Georgia State University law students in the HeLP Clinic. Once I heard about the HeLP Clinic again during my Fundamentals of Medicine class in my third year, I knew I had to learn more.

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My Clinic Story: Embrace the Challenges

By: Hector Rojas, Spring 2017 Student Intern

Have you ever told yourself, “I can’t do that” or “that’s too hard” or even “I am not good enough?” I have…

My Clinic story began in the fall of 2015 when I attended my law school’s experiential learning fair. During that fair, I learned about the various clinics my school offered to help students gain practical experiences prior to graduating law school. Because I was most interested in business law, I inquired into the Investor Advocacy Clinic. I was given the opportunity to speak with current student interns of the clinic and to the now director of the clinic, Professor Iannarone. During my discussions with the interns, I learned what the Investor Advocacy Clinic was all about. I was very interested; however, I was hesitant to join because I knew nothing about securities arbitration. So, I left the experiential fair that day with the thought of “I can’t do that.”

Even though I thought I could not be a part of the clinic because I did not know about securities arbitration, I decided to take the pre-requisite class, Business Arbitration Practicum, which is required prior to becoming a student intern of the clinic. Throughout that class, we were given various assignments that would simulate the work that was done in the clinic. There was not one time I did not think “that’s too hard” or “I can’t do that” when I was given these assignments.

To overcome those thoughts, I did the only thing I know to do in these situations, work hard. I solicited feedback from my professors, discussed the assignments with my classmates, and did individual research to learn about the subject matter. I repeated this process with every assignment I was given, and at the end of the semester I ended up sharing the highest grade of the class with another classmate.

The purpose of that story is to tell anyone who is reading this that it is okay to be intimidated, scared of failing, or even think you are not good enough to do whatever it is you wish to do. What is not okay is not trying because of those thoughts. If I had let those thoughts take over, I would have never been a part of the clinic. I would have never had the opportunity to work and help real clients. I would have never had the opportunity to work with great colleagues and receive feedback on my work. And most importantly, I would have never developed into the person I have developed into because of the clinic. The clinic was great, and if you want to hear my story pertaining just to the clinic, click here.

For this post, however, I thought I try to inspire anyone out there who wishes to do something new, but are afraid of failing. I am here to tell you that based on my experiences, the only way you will fail is if you don’t try. If you try, however, and put in the time and hard work, then there is no way you can fail. And even if you do find yourself “failing,” at least you know you had the courage to try and gave it your very best. At the end of the day, I believe that is how success is measured, which is by your individual effort.

I have no regrets with my decisions to join the clinic. Nor do I have any complaints about the clinic. The clinic does something really special in that it helps investors who have been harmed by their brokers and cannot afford to seek the assistance of counsel because of the size of their claim. I have grown as a person and as a professional because of my time in the clinic. I recommend to anyone out there who wishes to try something new but are afraid they cannot do it, to just try. It may not be easy, but going through the process will make you a better person and teach you valuable lessons that you can use in any future endeavors. The clinic has been a wonderful experience for me and I recommend its services to any investor which meets our qualifications, and to any Georgia State College of Law student who wishes to gain practical experiences prior to graduating.