Financial advisory and broking services including robo advisory and auto-trading
FinTechs belonging to this category offer advisory and broking services for investments usually via an internet platform.
Robo advisory services usually offer an investment proposition following a series of questions concerning the personal financial background and the risk-bearing capacity of the user. Sometimes the respective platform also enables the user to directly execute the proposed investment.
Auto-trading concerns all services which automatically trade on behalf of the customer according to his or her specifications.
Apart from that some FinTechs collect and offer merely or as an ancillary service market information or operate comparison portals to increase the transparency of the capital markets and to help the investor with his decision-making.
There are also FinTech-advertising-services which advertise various financial services or products.
Attitude of the country towards modern financial advisory and broking services
Automated brokerage and robo-advisory services are not broadly adopted but are a growing segment of the market. Algorithmic high-frequency trading comprises a significant percentage of overall market activity. Regulator attitude presently skews more towards additional investor protection over proliferation of financial innovation.
Obligations and requirements to provide financial advisory and broking services, or ancillary services described above
Robo-advisors and auto-traders are subject to completely different regulatory regimes. Robo-advisors are governed federally under the Investment Advisers Act of 1940, are regulated by the SEC and, generally, are exempt from the substantive provisions of state investment advisory laws. Auto-traders are governed federally under the Exchange Act, are regulated primarily by the FINRA (who essentially has been outsourced this authority by the SEC) and are subject to state registration and licensure requirements in states in which they have customers. While less common, it is also possible that a robo-adviser could be subject to regulation by the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor.
For a robo-adviser to be eligible for federal registration, it must offer investment advice exclusively through an interactive website (subject to a 15 client de minimis exception), provide a record demonstrating that it only offers advice through the interactive website, and it cannot control, be controlled by or be under common control with a relying adviser.
The legal obligations of broker-dealers and investment advisers are described in greater detail above under “Asset and portfolio management—Legal affairs”.
Additional comments regarding the legal situation for financial advisory and broking services, or adjacent services or what FinTech’s must be aware of in this business area
There is a significant amount of uncertainty regarding auto-trading in the context of digital assets, decentralised finance (DeFi) protocols and automated market makers (AMMs). Further, the SEC has had multiple examination initiatives specific to robo-advisers and thus the considerations for operating a robo-advisory business are more specialised than those of an investment adviser. Additional considerations are described in greater detail above under “Asset and portfolio management—Legal affairs”.
Market size for financial advisory and broking services as well as adjacent services and biggest companies in this business area
While the United States robo-advisory market represents only a small fraction of total assets under management, it is growing and still represents hundreds of billions, if not trillions, of assets under management. Robo-advisors with reported assets under management of greater than $20 billion include the robo-advisory arms of Vanguard, Charles Schwab, Betterment and Wealthfront, although Vanguard has more assets under management than its next five (5) competitors combined.
Additional comments regarding the economic situation for financial advisory and broking services as well as adjacent services or what FinTech’s must be aware of in this business area
In addition to robo-advisors, there has been an increase in popularity of automated investment adviser referral services such as SmartAsset.
As a general matter, robo-advisers face lower regulatory burdens than broker-dealers.