FINRA Warns BDs to Follow Robo-Advice Rules

The report is designed to remind FINRA member firms offering digital advice services "of their investor-protection obligations under our rules," Axelrod said.

FINRA told firms to ensure that have policies and procedures in place in the following five areas:

• Besides testing advice tools' algorithms, including initially assessing the methodology of digital tools and the quality and reliability of data inputs, FINRA wants firms to perform and "ongoing evaluation" and test such tools to ensure they are performing as expected, and to determine whether models used by a tool remain appropriate as market conditions change.

• Firms also need to assess both a customers' risk capacity and risk willingness, and addressing contradictory or inconsistent responses in customer-provided information.

• Financial professionals at broker-dealers must also understand the key assumptions and limitations of individual digital investment advice tools, and determine when use of a tool may not be appropriate for a client.

• Broker-dealers are also responsible for determining the risk, return and diversification characteristics of a portfolio that is suitable for a given investor profile, and mitigating – through avoidance or disclosure – conflicts that can arise through the selection of securities for a portfolio.

• Broker-dealers must provide descriptions of how the tool's rebalancing works and set out procedures that define how the tools will act in the event of a major market movement.

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