THE Securities Commission Malaysia (SC) has introduced a Digital Investment Management (DIM) framework for digital investment managers, otherwise known as providers of automated discretionary portfolio management services to investors. Or you can call them robo advisers. According to the SC, digital investment management is a fund management business which incorporates innovative technologies into discretionary portfolio management services.
Forrester Research in a report dated August 2016 highlighted that robo advisors, which are a type of digital investment manager, use the Internet to offer to retail investors managed accounts at much lower fees than established asset management, life insurance, and wealth management firms do. For the SC, the introduction of the framework is a continuation of its digital agenda, which began in 2015 with the introduction of the equity crowdfunding (ECF) and peer-to-peer financing frameworks.
The framework aims to provide investors with a more convenient, affordable and accessible channel to manage and grow their wealth. The SC hopes that the new framework will appeal to younger investors of the digital generation, who are digitally savvy and hence more receptive to using technology to invest. It is already seeing this shift to a younger investor group in ECF. The average age of investors in the capital markets is 45, whereas 40% of investors in ECF are aged 35 and below.
Digital investment managers are a convenient, accessible and affordable option due to automated processes and a lower cost structure, hence the barriers to entry for young investors are lower.
According to the SC, to reinforce investor protection, specific conduct requirements have been set out for providers. This includes the requirement for the board of the provider to be accountable for the digital investment management business by ensuring that:
- The requisite technology capabilities are in place including identification of a competent person within the company who has sufficient understanding of the risks and rules of the algorithm applied.
- The risk management framework is sufficiently robust to manage risks associated with the offering of automated discretionary portfolio management services including cyber security resilience.
- The outcomes produced by the algorithm are consistent with the digital investment manager’s strategy.
- Written policies are in place to monitor and regularly test the algorithms employed.
The SC notes that currently licensed portfolio management companies may provide digital investment management services provided they satisfy all the requirements in the updated licensing handbook and relevant guidelines.
Those who wish to offer digital investment management services are allowed to apply for the new licence effective May 9, 2017.