| 1 |
Purpose
With the rapid technological advancement and market changes and needs, securities investment consulting enterprises are providing securities investment consulting services with automated tools ("robo-advisor") which use algorithms to combine automatic execution in computer systems and to provide online wealth management consultation and investment management services.
To facilitate the development of robo-advisor services, these Guidelines for Securities Investment Consulting Services of Securities Investment Consulting Enterprises (SICEs) with Automated Tools (Robo-Advisor) (the "Guidelines") provide relevant technological and procedural requirements relating to robo-advisor services as well as necessary precautions to customers using robo-advisor services.
|
| 2 |
Definition
For purposes of these Guidelines, "robo-advisor services" refer to providing consultation services on customers' investment portfolios entirely online with little to no human intervention.
The foregoing human intervention is auxiliary in nature which only assists customers in completing the Know Your Customer procedure or provides customers with explanation to their recommended investment portfolios obtained from robo-advisors. It will not adjust or expand robo-advisors' investment portfolio suggestions nor provide other investment portfolio suggestions that are not automatically created by the robo-advisor systems.
|
| 3 |
Supervision of Algorithms
Algorithms are the center of robo-advisor services and reflect the logic of such robo-advisor service providers behind market analysis and research. The accuracy of the algorithmic designs will affect and impact the calculation results which are pivotal to customers' interests and rights. Hence, each robo-advisor service provider shall establish an internal supervisory mechanism as follows and conduct effective supervision and management of the algorithm it uses for its system:
- Initial Review
- Assessing whether the algorithm used would produce the anticipated effect, and understanding the methodology used for the algorithm and the assumptions, errors and preferences of the system;
- Understanding the data inserted into the system;
- Conducting output tests to confirm meeting of the anticipated effect.
- Regular Review
- Assessing whether the model used by the computer system would still be applicable in case of any change in the market or economic conditions;
- Regularly conducting tests on the results rendered by the system to ensure meeting of the anticipated effect;
- Appointing officers to monitor and manage the system.
|
| 4 |
Know Your Customer Procedure and Recommended Investment Portfolios
Customer information shall be established to conduct Know Your Customer procedure before providing any recommended investment portfolio to customers.
Each assessment indicator shall be designed in collaboration with the design of robo-advisor system. In addition to understanding customers' investment objectives and periods of investment, robo-advisor service providers shall also have sufficient knowledge and assessment of, including but not limited to, customers' investment knowledge, investment experience, financial conditions and levels of risk tolerance.
Any robo-advisor service provider shall take into consideration the following factors in its designing of online questionnaires:
- The questionnaire should be able to obtain sufficient information of customers so as to provide appropriate investment advice.
- The questionnaire should set out clear and specific questions and uses hints where appropriate to provide additional explanation.
- A proper mechanism should be designed and established to handle situations where inconsistent or contradictory answers have been obtained from customers.
After comprehensively considering each assessment indicator, robo-advisor service providers shall recommend relevant investment portfolios in accordance with customers' levels of risk tolerance.
Robo-advisor service providers shall request customers to update various information and assessment indicators on a regular basis so as to ensure that the new investment portfolios recommended to their customers suit the respective risk tolerance of the same. With respect to those investment portfolios already existing prior to the update of such information that no longer falls within the level of risk tolerance of customers, robo-advisor service providers must obtain customers' approval before continuing to provide management service or adjust the original investment portfolio to fit the level of risk tolerance of such customer. Failure to provide the aforementioned updates on part of customers will allow such robo-advisor service provider to continue implementing the original investment portfolios as originally provided.
|
| 5 |
Fair and Objective Implementation
To faithfully place customers' interests as top priority, avoid conflicts of interest, prohibit unjust enrichment, and provide fair treatment etc. as principles, any robo-advisor service provider shall prevent from involving in any situation that may potentially result in a conflict of interest against its customers from an establishment and decision making of recommended investment portfolios. For example, when the objectivity of a robo-advisor's suggestion is affected by any compensation or interest such robo-advisor service provider receives from a product supplier, then such robo-advisor service provider shall ensure that its robo-advisor system is capable of performing the following functions fairly and objectively:
- Determining parameters for the investment portfolios such as investment return, dispersion, credit risk and liquidity risk.
- Establishing criteria for selection of securities in investment portfolios such as transaction cost, liquidity risk and credit risk etc.
- Selecting appropriate securities in investment portfolios; if such securities are selected by algorithms, those algorithms shall be reviewed and audited as well.
- Examining whether the default investment portfolio recommendations are appropriate for such type of risk tolerance of the matching customers.
|
| 6 |
Rebalancing of Investment Portfolios
Because of the difference in the return on investment of each asset in the investment portfolios, it may be necessary to re-adjust relevant percentage of allocation of assets in a recommended investment portfolio in order to meet such customer's level of risk tolerance or to retain the original percentage of allocation to reduce the risk of the investment portfolio. As such, robo-advisor system shall have automatic rebalancing functions in accordance with the following:
- Clearing notifying customers that a rebalancing of investment portfolios is available;
- Disclosing to customers how such rebalancing operation in the system, including regular review of investment portfolios, and relevant timing for initiating and terminating the rebalancing functions.
- Informing customers of each of the costs and other potential restrictions that may arise from rebalancing investment portfolios;
- Entering into relevant agreement in advance with customers on terms of investment portfolio rebalancing as part of robo-advisor services;
- Establishing policies and handling procedures of robo-advisor system in response to material market changes.
The foregoing agreement concerning rebalancing of investment portfolios shall include without limitation the following conditions to be able to adjust the respective investment portfolio to its original percentage of investment in the portfolio.
- Timing of Implementation
- Regular Review: conducting regular reviews on a monthly, quarterly, semi-annual or annual basis;
- Irregular Review: conducting review upon satisfaction of conditions that are either set up at default or otherwise specified by customers.
- Conditions to implementation: The profit and loss of each individual investment target or overall investment portfolio has reached the default standard, or has deviated from the original percentage of investments to the default standard.
- Implementation Method: Sell or purchase via new additional fund remittance, interest distribution etc., or sell or purchase in respect of each target in the investment portfolio for the purposes of adjusting the percentage of investments to the original target investment portfolio percentage.
Any investment target or percentage of investment in a rebalanced investment portfolio that is different from what has been agreed shall not be implemented and adjusted until obtaining the prior approval from such customer.
|
| 7 |
Specialized Committee Supervision
A specialized committee shall be organized within the enterprise or its group to be responsible for design of customer questionnaires, development and adjustment of algorithms, recommendations of investment portfolios befitting customers' risk profiles, fair and objective operation of robo-advisor systems, supervision and management of rebalancing of investment portfolios, or participation in reviews or on-site investigation conducted by external software developers, to assess whether the systems are properly designed. Such specialized committee shall ensure that comprehensive prevention, detection and resolution measures for internet security have been established.
The specialized committee may invite external professionals to participate in the foregoing supervision or appoint professional organizations to provide the supervision required.
|
| 8 |
Notice to Customers concerning Customer Precautions for Use of Robo-Advisor Services
Any investment securities consulting enterprise engaged in robo-advisor services shall notify its customers of the following matters before their initial use of the services:
- Customers shall read carefully the content of the services or other publicly disclosed information: Customers shall first review all relevant documents having been disclosed for robo-advisor services, and understand the content and terms contained therein, for example, descriptions of algorithms or structuring of investment portfolios, charges or other fees for using robo-advisor services, conditions to termination of robo-advisor services and subsequently handling, and required time for asset realization, so as to protect customers' own interests and rights.
- Customers shall recognize the internal limitations of investment tool and the potential gaps existing in reality including:
- Basic assumption of the system or program: Customers shall recognize that the system has its own limitations and important basic assumptions which may not confirm with reality or individual case scenarios. For example, if robo-advisor service system anticipates an upward trend in the interest rate while the market interest remains low, then the system's assumption would not conform with reality.
- Product Provision Range: Customers shall understand the limitations of the range of products the system can offer. For example, it may include only funds or ETFs and exclude individual stock/shares, and therefore, may not conform with such customer's investment objectives. In addition, individual products such as ETFs may not include all ETFs on the market, and would thereby limit the recommended investment portfolio proposals.
- Customers shall understand that robo-advisor services rely directly on the information provided by customers: The list of questions set forth by the system would limit or affect the information provided by customers which further affects the results produced by the system (i.e. recommended investment portfolios). Hence, if customers do not understand any question posed by the system, they shall immediately consult robo-advisor service provider. Customers shall also be aware that the questions set forth by the system may be overly generalized, ambiguous or misleading which may induce customers to select the default options of the system.
- Customers shall be aware that the system results may not correspond to customers' personal financial needs or targets: robo-advisor services cannot evaluate all the situations and environments of customers such as age, economic conditions and financial needs, investment experience, other assets, tax status, willingness to accept risks, investment return period, cash flow needs, and investment objectives etc., and therefore the recommended investment portfolios may not actually suit every individual customer. For instance, the system may only consider a customer's age but fails to consider such customer's asset allocation at other financial institutions or any potential plan to purchase real property sometime after making the investment. The system may also fail to consider that customers may possibly change their investment objectives and thereby fail to make corresponding adjustments.
The foregoing precautions to be notified to customers prior to their initial use of robo-advisor services shall be acknowledged and understood by customers in writing, electronically or in other formats capable of obtaining and ensuring customers' confirmation.
|
| 9 |
Other Special Notes
Robo-advisor services are provided online, a type of commercial mode which differs greatly from traditional face-to-face servicing. Any securities investment consulting enterprise providing robo-advisor services shall be careful with the following in its manner of information disclosure:
- Abstruse specialized terms or jargons shall be avoided to allow customers, when without assistance from any customer service personnel, to still be able to understand relevant important ideas or concepts.
- Important information shall be emphasized in disclosure such as by means of a pop-up window.
- Relevant information may be disclosed with interactive fonts such as tooltips or such other forms to provide additional details, e.g. "Frequently Asked Questions".
|