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BlackRock Publishes Paper on Rise of Digital Advisors; Recommends Policy Makers Focus on Certain Areas

In a white paper published in September 2016, BlackRock analyzed the rapid growth of digital advisors, commonly known as “robo-advisors,” and the implications for the financial services industry. Generally, digital advisors provide advisory services to clients via internet-based platforms using algorithmic portfolio management strategies. The BlackRock paper noted that what began as a niche part of the advisor market is becoming more accepted with growing investor interest and participation. The U.S. Department of Labor’s Fiduciary Rule and financial regulation in the United Kingdom are expected to further increase the profile and use of digital advisors as these regulations may decrease the number of traditional investment advice avenues. According to the paper, a KPMG estimate puts the assets managed by digital advisors at roughly $55-$60 billion a year at the end of 2015, which is a small portion of the $24 trillion U.S. retirement market. Some of the benefits of digital advisors include: increased likelihood that clients will engage on obtaining financial advice, particularly younger investors more accustomed to electronic communications; and increased efficiency in communications and accessibility to information and advice for clients. The paper noted that digital advisors are subject to the same regulations and supervision as traditional advisors, including the suitability rules of the SEC and other regulatory agencies, including FINRA. The paper recommended that policy makers focus on certain areas with respect to digital advisors: (1) know your customer and suitability policies; (2) algorithm design and oversight; (3) disclosure standards and cost transparency; (4) trading practices and (5) data protection and cybersecurity.

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