Thursday, February 24, 2022 / 04:10 PM / by Davidson Oturu and Al-Ameen Sulyman of Aelex / Header Image Credit: Aelex

Introduction

On 30 August 2021, the Security and Exchange Commission ("SEC") unveiled its rules applicable to persons who provide Robo Advisory Services in Nigeria ("the Rules"). This was preceded by the SEC earlier publishing, proposed rules on Robo Advisory Services. The Rules signify the developments the SEC has continued to undertake in strengthening financial advisory services in Nigeria.

In this article, we examine the provisions of the Rules and consider how it impacts on the financial advisory market in Nigeria.

What are Robo Advisors?

Robo Advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical Robo Advisor collects information from clients regarding their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client assets¹.

What are Robo Advisory Services?

By the Rules, Robo Advisory Services are defined as providing investment advice using automated, algorithm-based tools that are client-facing, with little to no human advisor interaction in the advising process.

Although the technology is not novel and has been used by wealth managers since the 2000s, the introduction of the modern Robo Advisory has resulted in direct interaction with consumers. It can handle complicated instructions, including investment selection, retirement planning and tax-loss harvesting. The industry has also experienced explosive growth as a result, with client assets managed by Robo Advisors reaching nearly $1 trillion in 2020 and expected to exceed $2.9 trillion worldwide by 2025².

Robo Advisors v Traditional Service Providers

For decades, investment advisory was carried out by professionals such as financial advisors, brokers, and investment advisers. These professionals provided financial advisory services that involved the purchase and sale of and stocks for investors. They are usually entitled to a commission of the investment made on behalf of their clients, which served as an additional motivation aside from the ethical obligations to the investor.

These advisors, referred to as traditional advisors, were attractive to investors for many reasons. Firstly, they were believed to have a "human" touch, and investors felt more comfortable getting their complaints resolved by interacting face-to-face or through the phone with their advisors. They were also be considered a little more "effective" as they kept their investment strategy aligned with the changing financial aspirations. It was most suited to investors willing to invest a large amount of money, partake in all stages of investment and be interested in strategic risk-taking investment³. However, as most traditional investment advisories impose restrictions on the minimum amount to invest, it was not suitable for a wide range of investors. Furthermore, there were variables in place that even the most advanced and experienced advisors may not be able to foresee or predict.

With the advent of modern technology, algorithms were developed to aid financial advisory and, these may ultimately replace traditional advisors. Unlike traditional advisors, these technology-backed advisors used automated, algorithm-based tools in the advising process with little to no human interaction.

Indeed, Robo Advisors gained acclaim due to certain functions that differentiated it from the traditional advisors. They were convenient, easily accessible, and always available, limiting investors from the rigours of booking appointments with advisors. Investors could also make complaints and have them quickly resolved, and it catered for a wide range of investors. Generally, they are suited to investors who are unwilling to invest a large amount of money, are more comfortable interacting through online platforms rather than in-person and are not particularly concerned about investment strategies.

Who can provide Robo Advisory Services in Nigeria?

Characteristically, Robo Advisory services are provided when a client answers a series of questions on his risk tolerance, investment objectives, investment time horizon, inputs an investment amount, the input is analysed using algorithms, and a portfolio is recommended to the client.

Consequently, all Capital Market Operators ("CMO") and persons (Individual & Corporate) who are offering or seeking to offer Robo Advisory services in the Nigerian Capital Market are to abide by the Rules.