Robo-advice is characterised by two basic features:

• Human interaction or human intervention in the advisory/investment process is either completely absent or only present to a limited extent; the customer communicates with the IT system – for example via a smartphone app or a website.

• The service is provided on the basis of an algorithm. The solution offered to customers is based on prior data input. This includes objective data such as age and occupation as well as subjective data, such as the investment objective, the individual financial situation and the individual financial skills.

Automated portfolio management

In automated portfolio management, a provider takes over the management of customer assets and has scope for discretion in making investment decisions.

Automated portfolio management

© Ilja Gafarov/BaFin

The remuneration for the providers of automated portfolio management is usually determined as a percentage of the custodian account balance and often includes a performance-related component.

Authorisation requirement

The provision of automated portfolio management requires authorisation from BaFin in accordance with section 32 (1) sentence 1 of the German Banking Act (Kreditwesengesetz – KWG) and section 15 (1) of the German Investment Firm Act (Wertpapierinstitutsgesetz – WpIG). Portfolio management means managing individual assets invested in one or more financial instruments for others on a discretionary basis, section 1 (1a) sentence 2 no. 3 of the KWG and section 2 (2) sentence 1 no. 9 of the WpIG.

Unlike automated investment advice, automated portfolio management amounts to more than just a one-off investment recommendation. Instead, it is characterised by a certain degree of longevity. The investment decisions are implemented by the asset manager and not the customer.

A service qualifies as portfolio management if the asset manager is granted scope for discretion when making decisions on behalf of the customer. This is not the case, in particular, where the asset manager is tasked only with implementing those investment decisions that are subject to explicit approval by the customer on an individual basis. What is therefore critical is whether or not the investment decisions are based on the asset manager's own discretion and implemented by the manager as such (including by way of third parties).

The provision of portfolio management also requires that the assets managed must be invested in financial instruments. The term financial instruments, defined in section 1 (11) of the KWG and section 2 (5) of the WpIG, respectively, incorporates among other things shares, certain investment products within the meaning of the German Capital Investment Act (Vermögensanlagengesetz – VermAnlG), debt instruments, certain other rights, units in investment funds within the meaning of the German Investment Code (Kapitalanlagegesetzbuch – KAGB), money market instruments, foreign exchange and units of account, derivatives, emission allowances and crypto assets.

BaFin is generally only able to provide a conclusive supervisory assessment, in particular of the requirement for authorisation under section 32 (1) sentence 1 of the KWG or section 15 (1) of the WpIG, where information is provided regarding the contractual agreements which are intended to form the basis of the respective business.

Practical information

In many cases, in view of the preparations necessary before business activities requiring authorisation can commence, the companies that will later be responsible for operating the undertaking and holding the authorisation are expected to be established at a very early stage. These preparations include concluding leases for office space and hiring staff. It is important to note that the commercial register entry (where required) of a company intending to provide the services requiring authorisation later on can only be carried out by the registration courts if verification of the aforementioned authorisation has been submitted to the court (section 43 (1) of the KWG or section 30 of the WpIG).

General information on making an application for authorisation can be found in the joint Notice issued by BaFin and the Deutsche Bundesbank on the granting of authorisation to provide financial services under section 32 (1) of the KWG.

Frequently asked questions

Platforms that provide automated investment recommendations and suggestions

The operators of platforms for automated advisory services on financial investments offer customers and interested parties the opportunity to receive an investment suggestion, a model portfolio or an investment recommendation. These suggestions are generated even if the customer or interested party does not first register on the operator's platform, on the basis of personal information entered by the customer or interested party beforehand.

Platforms that provide automated investment recommendations and suggestions

© Ilja Gafarov/BaFin

In some cases, the investment suggestion can also be implemented on the platforms. However, this requires registration and the opening of a securities account, which may even be carried out when the customer registers for the first time with the robo-advice platform itself.

The services provided by the operators are remunerated by the customers, for instance in the form of commissions or by way of a fee-based model, such as a monthly flat fee that encompasses all the services offered by the provider.

Authorisation requirements

General

Of particular importance for robo-advice are those financial and investment services which are conclusively standardised in section 1 (1a) sentences 2 and 3 of the KWG or section 2 (2) of the WpIG and which concern the investment of assets in financial instruments within the meaning of section 1 (11) of the KWG or section 2 (5) of the WpIG.

These include in particular the broking of and advice on transactions with financial instruments as well as the management of assets invested in financial instruments by means of a custodial power of attorney. In detail these are
• investment advice within the meaning of section 1 (1a) sentence 2 no. 1a of the KWG and section 2 (2) sentence 1 no. 4 of the WpIG;
• investment broking within the meaning of section 1 (1a) sentence 2 no. 1 of the KWG and section 2 (2) sentence 1 no. 3 of the WpIG;
• contract broking within the meaning of section 1 (1a) sentence 2 no. 2 of the KWG and section 2 (2) sentence 1 no. 5 of the WpIG; and
• portfolio management within the meaning of section 1 (1a) sentence 2 no. 3 of the KWG and section 2 (2) sentence 1 no. 9 of the WpIG.

BaFin is generally only able to provide a conclusive supervisory assessment, in particular of the requirement for authorisation under section 32 (1) sentence 1 of the KWG or section 15 (1) of the WpIG, where information is provided regarding the contractual agreements which are intended to form the basis of the respective business.

Investment advice

Investment advice within the meaning of section 1 (1a) sentence 2 no. 1a of the KWG or section 2 (2) sentence 1 no. 4 of the WpIG that is subject to an authorisation requirement exists when a personal recommendation is given to buy, sell or keep a financial instrument, if said recommendation is based on an evaluation of the investor's personal circumstances or is presented as being suitable for the investor. For the authorisation requirement, it is irrelevant whether or not service providers make use of automated processes and which channel of distribution they use to approach potential customers.

Robo-advice is usually categorised as investment advice subject to an authorisation requirement if customers, on the basis of the details they provide, receive investment suggestions relating to specific financial instruments – for example, with reference to the exact name of the instrument, e.g. “Deutsche Lufthansa share ISIN DE0008232125”. The customer not only receives a suggestion on how to structure their portfolio, but also a concrete suggestion regarding which financial instruments to purchase, and in some cases also an indication of a concrete number of units.

If the customer, based on the data they have provided, receives a suggestion on the structuring of their portfolio that lists different asset classes or industries, in terms of percentages and without names of specific financial instruments, the robo-advisor is generally not providing investment advice subject to an authorisation requirement (for the supervisory assessment in individual cases, see above).

The extent of the customer exploration or how thorough it is will generally have no influence on how the authorisation requirement is assessed. As soon as investment advice has been given in the form of a personal recommendation, the corresponding statutory conduct obligations must be observed. For example, the robo-advisor must collect customer information to the extent required by law.

Investment broking

As part of a robo-advice offer, the operator may also provide investment broking within the meaning of section 1 (1a) sentence 2 no. 1 of the KWG or section 2 (2) sentence 1 no. 3 of the WpIG that is subject to an authorisation requirement. This is the case if the provider brokers transactions on the procurement and disposal of financial instruments.

Broking is performed by those who, in the role of an intermediary, pass on the investor's declaration of intent relating to the procurement or disposal of financial instruments. The targeted encouragement of investor willingness is also considered to be broking. If the robo-advisor recommends a particular financial instrument on the basis of an evaluation of the investor's personal circumstances, they are generally also providing investment advice subject to an authorisation requirement.

Here, too, the decision whether or not investment broking and/or investment advice is performed or whether the service provided is exempt from the authorisation requirement must always be made on a case-by-case basis.

Contract broking

As an alternative to investment advice, contract broking within the meaning of section 1 (1a) sentence 2 no. 2 of the KWG or section 2 (2) sentence 1 no. 5 of the WpIG may also be involved. This, too, is subject to an authorisation requirement. Whereas the investment broker passes on the customer's declaration of intent to the seller or purchaser of the financial instruments in the capacity of an intermediary, the contract broker submits their own declaration of intent as their customer's representative.

On the topic of portfolio management under section 1 (1a) sentence 2 no. 3 of the KWG and section 2 (2) sentence 1 no. 9 of the WpIG that is subject to an authorisation requirement, see also automated portfolio management.

Anyone who provides investment advice and/or investment broking, contract broking or portfolio management subject to an authorisation requirement must in particular comply with the rules of conduct laid down in Part 11 of the WpHG.

Practical information

The companies which will later be the entities responsible for the business and holders of the authorisation should be set up at a very early stage. In this way, they can make the preparations necessary for an activity requiring authorisation. For example, they can conclude leases for office space or hire staff. Here it must be remembered that a company intending to subsequently perform services requiring authorisation may only be entered in a commercial register by a court of registration once the court has been provided with evidence of such authorisation (section 43 (1) of the KWG and section 30 of the WpIG).

General information on how to apply for an authorisation can be found here: Notice on the granting of authorisation to provide financial services under section 32 (1) of the KWG and information on investment services under the WpIG (Merkblatt zu Wertpapierdienstleistungen nach dem WpIG).

Even if you or your undertaking do not require authorisation under section 32 (1) sentence 1 of the KWG or section 15 (1) of the WpIG and/or are not subject to supervision by BaFin, there may still be an authorisation requirement, and legal requirements may arise under other laws, in particular the German Industrial Code (Gewerbeordnung – GewO) – mainly under section 34f of the GewO. You can obtain information on this subject from the competent trade offices (Gewerbeämter) or chambers of industry and commerce (Industrie- und Handelskammern – IHK) of the federal state where you wish to realise your project – e.g. for Hessen, the IHK of Frankfurt am Main.

General questions and answers on marketing and advertising on the internet in relation to activities requiring authorisation can be found in BT 3 of Circular 05/2018 (WA) – Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency (MaComp).

Frequently asked questions

Platform for signalling and automated order execution – signal following or social trading

Introduction

The operator of a signalling platform gives signal providers or traders the opportunity to manage their securities portfolios viewable to the public (reference portfolio). In this way, all the trading decisions the traders make can be observed, usually over the internet. If the customers of the platform operator can follow the traders and trade in parallel, this is called signal following or social trading.
Both the customer's portfolio as well as the reference portfolios are usually kept at an institution with which the platform operator cooperates. The customers (followers) of the platform link their own portfolio with one or more reference portfolios. Trading decisions made by the respective trader are then executed in an automated manner for the customer as well. This means that the customer can follow the trading or investment strategy of the trader(s) whom the customer considers the most successful.

Traders usually receive a remuneration for the publication of their trading decisions. The amount of their remuneration depends on factors such as the development of their portfolios, the number of followers they have or their followers' trading turnover. Their remuneration is usually granted, or at least brokered, by the platform.

In addition to adopting a trading strategy for one's own portfolio, there are other varieties of the business model which the follower can use to emulate the reference portfolios. It is conceivable, for instance, that the follower purchase securities (structured bonds, also known as certificates) that track the development of the reference portfolios. Through the return yielded by the latter, the follower participates in both the gains and losses of the reference portfolios.

Activities of the platform

Signal Following / Social Trading

© Ilja Gafarov/BaFin

Supervisory requirements of the parties involved

Activities of the signal providers (traders)

Signal providers publicly disclose their own securities accounts and execute trading decisions and securities orders. This does not, in principle, constitute business activity subject to an authorisation requirement pursuant to the KWG or WpIG.

Under certain circumstances, signal providers who work for the platforms described above are categorised as providers of investment recommendations. This is the case if they issue information on financial instruments or their issuers, and if this information:

1. contains, either directly or indirectly, a recommendation for a particular investment decision and
2. is intended to be made available to an unspecified group of individuals.

The signal provider, if considered a provider of investment recommendations in line with above principles, is subject to separate obligations. These obligations affect all persons who are responsible for the preparation of investment recommendations and do not constitute investment services enterprises, asset management companies or investment stock corporations. They must immediately notify BaFin of their activity pursuant to section 86 of the WpHG and comply with the statutory obligations arising from Article 20 of the Market Abuse Regulation (MAR) in conjunction with Delegated Regulation (EU) 2016/958 of the European Commission dated 9 March 2016. For example, they must prepare and present investment recommendations appropriately. They must also disclose circumstances or relationships that could give rise to conflicts of interest. BaFin monitors compliance with these obligations.

BaFin is generally only able to provide a conclusive supervisory assessment where information is provided regarding the contractual agreements which are intended to form the basis of the respective business.

Activity of the platform

Anyone who performs signal following or offers social trading as described above is generally subject to an authorisation requirement. They are providing financial services such as portfolio management (section 1 (1a) sentence 2 no. 3 of the KWG or section 2 (2) sentence 1 no. 9 of the WpIG), investment broking (section 1 (1a) sentence 2 no. 1 of the KWG or section 2 (2) sentence 1 no. 3 of the WpIG) or contract broking (section 1 (1a) sentence 2 no. 2 of the KWG or section 2 (2) sentence 1 no. 5 of the WpIG), and for these they require authorisation under section 32 (1) sentence 1 of the KWG or section 15 (1) of the WpIG.

In the case of the business model described above, the investor's assets are managed on the basis of the signal provider's decisions. Via the platform, the investor indirectly grants the signal provider the corresponding discretionary powers. The activity of the signal provider is generally attributed to the platform, which implements the signal provider's decisions into concrete customer orders and acts as the business model provider for the customers. The platform thus regularly provides portfolio management within the meaning of section 1 (1a) sentence 2 no. 3 of the KWG or section 2 (2) sentence 1 no. 9 of the WpIG.

When the platform forwards the signal providers' orders for their model portfolios to the cooperation partner, it is essentially performing investment broking pursuant within the meaning of section 1 (1a) sentence 2 no. 1 of the KWG or section 2 (2) sentence 1 no. 3 of the WpIG.

In addition, the platform translates the signal providers' signals into customer orders, without the customers submitting their own declaration of intent, and passes these on to the cooperation partner. It is thus usually also performing contract broking within the meaning of section 1 (1a) sentence 2 no. 2 of the KWG or section 2 (2) sentence 1 no. 5 of the WpIG.

Under certain circumstances, the platform's activities may also include the communication of investment recommendations, which then triggers other specific obligations. For more information on this topic, see question 3 below.

BaFin is generally only able to provide a conclusive supervisory assessment, in particular of the requirement for an authorisation under section 32 (1) sentence 1 of the KWG or section 15 (1) of the WpIG, where information is provided regarding the contractual agreements which are intended to form the basis of the respective business.

Practical information

The companies which will later be the entities responsible for the business and holders of the authorisation should be set up at a very early stage. In this way, they can make the preparations necessary for an activity requiring authorisation. For example, they can conclude leases for office space or hire staff. Here it must be remembered that a company intending to subsequently perform services requiring authorisation may only be entered in a commercial register by a court of registration once the court has been provided with evidence of such authorisation (section 43 (1) of the KWG and section 30 of the WpIG).

General information on how to apply for authorisation can be found in the Notice on the granting of authorisation to provide financial services.

Even if you or your undertaking do not require authorisation under section 32 (1) sentence 1 of the KWG or section 15 (1) of the WpIG and/or are not subject to supervision by BaFin, there may still be an authorisation requirement, and legal requirements may arise under other laws, in particular the GewO – mainly under section 34f of the GewO. You can obtain information on this subject from most of the competent trade offices or chambers of industry and commerce in the federal state where you wish to realise your project – e.g., for Hessen from the IHK Frankfurt am Main.

If an investment recommendation subject to a notification requirement exists, you can use one of the following notification forms pursuant to section 86 of the WpHG:

Notification in accordance with section 86 (1) of the German Securities Trading Act (WpHG) for natural persons (PDF, 79KB, not barrier-free)
Notification in accordance with section 86 (1) of the German Securities Trading Act (WpHG) for legal persons and associations of persons (PDF, 74KB, not barrier-free)

Frequently asked questions