SC introduces Digital Investment Management framework
By Sharmila Ganapathy-Wallace May 11, 2017
- Provide investors with a convenient, affordable and accessible channel to manage, grow their wealth
- Digital investment management services a more scientific method for less sophisticated investors.
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 DIM framework is aimed at increasing investor participation.
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.
Meanwhile, an industry player reacted positively to the SC’s new framework. When asked how digital investment managers will impact the current way of trading, N2N Connect Bhd managing director Andrew Tiang says that the former may be a more scientific form of investment, compared to rumours or hearsay for those not sophisticated enough to understand financial statements or technical charting.
“The impact should be positive except for the remisier who may become more distant when his or her clients become more independent. Having said that, some remisiers could actually leverage on it to help guide their clients who rely on their services,” he tells Digital News Asia via e-mail.
He feels that it is sensible for brokerages to embrace new technology as that is the way forward. “It (technology) can enhance service consistency via a scientific manner of delivering value-added services. After all, brokerages want transactions and anything that can convert into transaction activity will benefit the brokerages,” he adds.
As to the impact of the new framework on N2N's business, Tiang says: “I think it will be great for us. For years, we have been working in various ways to help brokerages provide conducive means for their clients to find it compelling to initiate a trading action.
“We deliver world class fundamental data and charting tools and added the analytics from QUICK Corporation from Japan and more recently, Nikkei Market News that provide instant news to market development. We also roll out algorithmic trading for the more advance traders.
“These are important tools that remisiers and traders need to make decisions. Robo advisors will be another good means that could trigger trading signals, where investors can make conscious and informed decisions to maximise trading opportunity and minimise unnecessary and careless risk exposure.”
Tiang commends the SC for rolling out the new framework. “Yes, it is great for the regulator to embrace new technological trends because technology is an enabler that could analyse multi-dimensional investments quickly and allow investors to make quick and informed decisions.”
However, Tiang cautions that computers don’t make decisions, humans do. He advises that investors understand the risk and action associated with every investment decision made and not to follow anyone blindly.
“Remember there is an old saying: ‘To err is human but to really screw things up, one will require a computer’,” he quips.