By Amanda Maine, J.D.
Representatives from firms that use technology to improve customer experiences in investing touted these platforms at a recent meeting of the SEC’s Asset Management Advisory Committee. Innovations in technology have not only improved the access of investment advice to customers, they have also been instrumental in allowing customers to shape their portfolios through customization and targeting individual goal objectives.
Motif. Hardeep Walia, senior vice president at Schwab Asset Management Solutions, spoke about his experience as founder and CEO of Motif, an investing firm that uses data science and automation to develop financial products for individual investors, financial institutions, and investment advisers. Motif was an early pioneer in the "deconstruction of investment advice," he said. Motif built systematic thematic investment models geared to individual investor needs; for example, if an investor wanted to invest in a theme like artificial intelligence (A.I.), Walia explained.
Walia said Motif took concepts like the A.I. example and deployed them in different product categories. If a client wanted to achieve exposure, Motif would build an A.I. ETF and give that client access to that ETF. If a client wanted some way of teasing out income from an investment in A.I., Motif put the client’s money in an annuity. However, if a client had a lot of money in a 401(k), Walia said that A.I.’s long-term structural trend wouldn’t make sense as an investment for that client.
According to Walia, as Motif built and deployed these different models, it kept running into regulatory questions about whether the firm was giving people investment advice and under what rule it would fall. In 2018, Motif launched a robo-advisor designed to allow a self-directed investor to express their value system to ensure that nothing was going into the investor’s portfolio that conflicted with the expressed individual values. This allowed an investor to tailor and customize Motif’s impacting models, Walia explained.
Motif then went to the SEC and to FINRA to express its view that Motif’s model was not "advice" under the regulations, Walia said. Motif gave its clients thematic models, which they could change to include what they wanted and exclude anything they didn’t like, and gave clients the ability to build their own models using advice not from investment professionals, but from relatives and friends. Walia gave the example of a client whose father was a retired vascular surgeon who remarked that he knew more about minimally invasive surgery than people on Wall Street and wanted to build his own model.
This led to conversations with SEC and FINRA about when a user builds their own model, about how such a model should be thought of from a regulatory perspective, and whether it should be considered "giving advice." Walia said that the retired vascular surgeon in his example could write a blog about minimally invasive surgery and what investors should buy, charge a fee for the blog, and because of the "publisher’s exemption," it would not be viewed as advice. All Motif did, argued Walia, was take that blog and make it customizable. After many conversations with the SEC and FINRA, Motif launched the Creator Royalty Program designed to take the content of its clients, put it on a platform, and the technology would seamlessly automate it, Walia said.
At the end of the day, Walia said, what needs to be asked when approaching novel uses of technology for investing is whether the platform is supposed to be beneficial to the end investor.
Orion. Eric Clarke, CEO of Orion Advisor Solutions, also offered his perspective on technology’s role in the evolution of investment advice. According to Clarke, Orion leverages technology to perform risk assessment for investors and leverages algorithms to help visualize future outcomes. By leveraging technology to help with investing, portfolios are individually implemented at scale and advisers are able to effectively scale reasonable investor restrictions and individual portfolio implementation through optimization technology, Clarke said.
Optimization technology is a mean variance engine that tries to build a portfolio that expresses the ideal balance between risk and return, Clarke explained. At Orion, the optimization technology will, within a few seconds, run multiple iterations to determine an outcome against the investor’s goal objectives. Goal objectives, he continued, can include a number of individually-tailored criteria chosen by that investor. For example, the optimization technology can be used to implement ESG (environmental, social, governance) restrictions on portfolios.
Another goal objective observed at Orion is used to customize portfolios around low-cost basis positions that investors use to minimize tax consequences, Clarke noted. Investors have also used goal objectives to restrict investing in particular securities, such as a situation where a customer works at an accounting firm that restricts the investor’s ability to own securities in a company for which the customer is providing auditing services or consultations.
Today’s investors have access to affordable technology that allows them to improve transparency at a very low cost, Clarke remarked. He cited in particular three areas of fiduciary advice that are important for an adviser to provide at scale. One, where advisers in the past had focused on asset management, today advice has changed, and advisers are building recommendations that leverage a holistic view of a client’s entire financial situation.
Secondly, technology is used to personalize investment strategies. Gone are the days where advisers had to put investors in funds that were different from or only somewhat similar to an investor’s objectives, he noted. And finally, technology has enabled the delivery of comprehensive reporting to investors at scale. This reporting includes not just the account activity that has taken place, but increased transparency shows the performance of portfolios against the investor’s specific benchmarks and the goals that they had previously outlined, according to Clarke.