Robo-advisory launch with discretionary rebalancing
Hanul Investment Securities holds an investment advisory license (투자자문업) but not a discretionary management license (투자일임업). It plans to launch a robo-advisor for 12,000 retail clients with a 10 million KRW minimum. The engine allocates a 60/40 stock-bond model portfolio, automatically rebalances whenever drift exceeds 5 percentage points, and charges 0.60% annually plus a 10% performance fee on returns above the KOSPI 200. Marketing materials call the service “principal-protected” and show a 7.2% annualized backtest. The engine uses a US-domiciled ETF and a foreign software vendor. One client, aged 71 with a five-year horizon and a conservative profile, was placed 80% in equities and lost 12% in four months; she says the salesperson told her the product “could not lose money.” The compliance officer asks whether the launch can proceed next month and what must be fixed. The firm has 45 days before the planned launch.
1. Which license(s) does Hanul need for automatic rebalancing and the performance fee, and why is the advisory license insufficient? Explain the supervisory consequences of launching as planned.
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Conclusion: the launch cannot proceed under the current license. An investment advisory license permits the firm to give advice; the client must make the investment decision. If the engine automatically rebalances whenever drift exceeds 5 percentage points, it is executing trades without obtaining the client's prior consent for each decision. That is discretionary investment management (투자일임업), which requires a separate registration, minimum capital, qualified personnel, custody and record-keeping arrangements, and different conflict-management rules. A blanket consent buried in the terms is not a cure; consent must be informed and revocable.
The performance fee is also problematic. A performance fee can be structured lawfully only if it is clearly disclosed, calculated on a defined high-water mark over a meaningful period, and not asymmetric. A fee on a backtested model portfolio that the client may not actually hold is misleading. “Principal-protected” is a prohibited guarantee: an advisory firm cannot promise principal, and the backtest must be labeled hypothetical with its assumptions. The US ETF raises a separate distribution question: retail solicitation of a foreign fund generally requires registration or an available exemption. Launching without the discretionary license risks correction orders, business suspension, fines, and criminal liability for unregistered business.
2. Evaluate the suitability and marketing issues in the 71-year-old client's case. Identify the specific conduct failures and the evidence you would collect.
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Suitability failure is clear on the facts. A 71-year-old client with a conservative profile, a five-year horizon, and retirement assets should not be placed 80% in equities without a documented, specific justification. The firm had to apply the suitability principle (적합성 원칙), explain the risk of principal loss, and obtain a recorded acknowledgement. For an elderly client, Korean conduct rules require heightened explanation and confirmation; a generic signature is weak evidence.
The salesperson's statement that the product “could not lose money” is a false explanation and an improper solicitation (부당권유). The 12% loss is consistent with the portfolio, so causation is plausible: the client relied on a guarantee that did not exist. Evidence to collect: the KYC questionnaire and scoring, the product explanation sheet, call recordings, the client's investment history, the marketing approval file, the algorithm's suitability logic, and the client's written complaint. The firm should not conclude “market loss, no compensation” before testing whether the recommendation was suitable and whether the guarantee statement was made.
3. Draft the remediation plan: client communications, compensation analysis, and controls before any relaunch.
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Remediation plan. (1) Suspend the launch and any live onboarding; notify the compliance committee and, if a breach is confirmed, the FSS. (2) Freeze new marketing and withdraw the “principal-protected” and 7.2% backtest materials. (3) Re-paper existing clients: obtain new consents, re-run suitability, and move unsuitable clients to cash or a lower-risk model at no cost. (4) Review the 71-year-old client's file for mis-selling; offer a complaint route and consider compensation through the firm's dispute process or the Financial Dispute Mediation Committee if the guarantee statement is substantiated. (5) Build controls before relaunch: separate advisory and discretionary licenses, high-water-mark performance fee, concentration and age-based limits, algorithm validation, vendor due diligence, and a ban on guarantees. (6) Report the supervisory findings and remediate the incentive plan that rewarded assets gathered. The firm should not relaunch until an independent review signs off.