ESMA Updates Portfolio Management and Robo-Advisor Guidelines

Firms need to highlight to clients the importance of providing accurate information so they can determine suitable investments.

The European Securities and Markets Authority (ESMA) has published a set of guidelines for portfolio management and investment advisory financial firms. Specifically, the updated recommendations provide clarification on robo-advisors and the “suitability assessment” in relation to MiFID II.

A suitability assessment refers to the process of collecting information about a client and then, based on that knowledge, selecting appropriate investment products. This is a typical process for portfolio management and investment advice firms.

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According to the guidelines, particularly when dealing with retail investors, firms should clearly inform their clients of this suitability assessment. This is, so clients understand why they need to provide certain information and realize the importance that the information is accurate, complete and kept up to date.

This is especially necessary when clients are detailing their investment knowledge, experience, risk tolerance, and financial situation. ESMA highlights the need for firms to convey to their customers that this information needs to be accurate. Otherwise they can’t provide effective investment advice and portfolio management services.

As to how companies do this, well, ESMA leaves that up to them. However, the European watchdog does highlight that firms should avoid giving the impression, or flat-out stating, that it is the customer who decides on the suitability of the investment. This includes avoiding the need for clients to confirm that an instrument or service is suitable for investment.

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ESMA Stresses the Importance of Explaining the Role of Robo-Advisors

In the report, ESMA also clarifies conduct surrounding robo-advisors. Particularly, the guidelines aim to “address potential gaps in clients’ understanding of the services provided through robo-advice.”

To achieve this, companies should provide their customers with “a very clear explanation of the exact degree and extent of human involvement and if and how the client can ask for human interaction.”

Firms should also endeavor to make clients aware that the answers they provide when speaking to a robo-advisor will have a direct impact when making investment decisions undertaken on their behalf, if applicable.

Furthermore, clients should be made aware of the resources that are being used to generate investment advice or execute portfolio management. For example, if a company uses an online questionnaire, then customers should be made away that this may be the sole basis for the robo-advice if this is the case.

The guidelines published by ESMA on Tuesday are not absolute obligations, but a strong recommendation from ESMA.

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