Market regulator SEBI recently unveiled a discussion paper on robo advisory and algo and high-frequency trading and sought comments from the public on it. These comments can be sent in till November 30 .

Robo advisors, without human interference, provide automated support for all financial advisory services, such as trading, investment, portfolio rebalancing and tax saving. It works with a pre-defined algorithm and analytics, calculating the best returns and plans for each individual as per his/her requirements and preferences.

According to KPMG-Nasscom’s recent study, robo advisory, which is reforming the landscape of wealth advisory services, is projected to grow at a CAGR of 68 per cent over the next five years and manage $5 trillion worth of assets by 2050 globally.

While some proposals are welcome, a few need further clarifications.

For instance, brokers should ensure that the automated tools used are fit for the purpose and put in comprehensive system audit norms which can be easily adopted.

However, the proposal that robust systems and controls have to be put in place to ensure that any advice made using the tool is in the best interests of the client and are suitable to the the client, has some grey areas. Defining the ‘best interest’ is rather subjective in nature and can lead to different interpretations. Some clarity on this rule will help both advisors and investors.

SEBI also proposes to let advisors disclose to clients the manner in which the various tools work and the limitations in their output. This is more easily said than done, as most advisors may not be technically savvy enough to undertake this task. They themselves may not be aware of the limitations in a program. At best, they could highlightcustomers on a few set of pre-determined issues.

SEBI has also proposed that the investment adviser using the tool be held responsible for the advice given. Fixing the responsibility will lead to some confusion as the ‘advice’ is being given by the robo, according to the requirements of the investor.

Another welcome proposal from SEBI is that automated tool should be used only for target clients, for whom it is designed.

However, since these are initial days, SEBI would do well to roll out more stringent and practical norms to check manipulators in the best interests of the investor community.

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