Regulators' alert on robo-advice puts advisers on notice

Advisers can use the guidance from the SEC and Finra to help shape their compliance policies

May 11, 2015 @ 2:51 pm

By Alessandra Malito

The Securities and Exchange Commission and Financial Industry Regulatory Authority Inc. together issued an alert to investors to be wary of automated online investment platforms, putting advisers on notice that the Wild West of robo-advice is not going unnoticed.

The regulators' alert, which was issued last Friday, mainly focused on investor protection issues, particularly security. And while the alert was for investors, there was a message for advisers, many of whom have been arming themselves with their own versions of online automated platforms in an attempt to thwart potential threats from robo-advisers such as Wealthfront and Betterment.

“The number of tools out there these days for financial advisers as well as individual investors is increasing,” said Sid Yenamandra, chief executive of Entreda, a cybersecurity and risk management company. “The biggest issue is security in the space.”

In their alert, the two regulators listed tips for investors using or thinking of using online investment platforms, such as:

• Understand any terms and conditions and ask the “automated investment tool sponsor whether it receives any form of compensation for offering, recommending or selling certain services or investments;”

• Consider the tool's limitations, including any key assumptions — automated investment tools may only consider investments offered by an affiliated firm;

• Recognize that the automated tool's output directly depends on what information it seeks and what information is provided;

• Be aware that an automated tool's output may not be right for every individual's financial needs or goals;

• Safeguard personal information, including being alert for phishing or other scams designed to trick an investor into providing personal financial data.

Todd Cipperman, principal of Cipperman Compliance Services, which offers compliance services to registered funds and money managers, said savvy advisers could use the investor alert to their benefit.

“I think an investor alert like that, you can think on one side it's fairly critical of online advisers,” he said. “But on the other hand ... it gives you an idea of what the SEC is thinking and what they're concerned about.”

As such, advisers can take advantage of this kind of alert, he said, by shaping their own compliance guidelines in response, which will allow them to stay aligned with the SEC and Finra.

“If they leverage this information properly, they can use it to communicate their value better,” added Robert Sofia, co-founder of Platinum Advisor Strategies, a marketing and practice management consulting firm, said. “I think that has to be their message — you get the platform, but you get us too.”

Also, by having a conversation with clients about the online tools and other services they can offer, advisers can better differentiate themselves with the purely automated investment platforms.

Mr. Yenamandra suggested advisers using any third party tools vet the services themselves and create a cybersecurity policy if they don't have one already.

“It's definitely a wakeup call,” Mr. Yenamandra said. “A lot of folks are using these tools to improve productivity, but they cannot forget the security ramifications that come with that.”

In the end, advisers can take the hint from the SEC and Finra to ensure the technology they're using is also working in their clients' best interests, a hot topic in the financial services industry today.

“It's an evolving technology. When websites came out in the mid-90s I remember the SEC was very cautious and had alerts about using websites, but then it became a part of life,” Mr. Cipperman said. “I don't think this is a fad. I think this is the way the world is going.”

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Oct 23

Conference

Women Adviser Summit - San Francisco

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

How men and women think differently about philanthropy

Women are more emotionally connected to their gifts, and want to donate time as well, says special projects editor Liz Skinner.

Latest news & opinion

The power of philanthrophy shifts to women, and advisers are taking notice

Philanthropic women are growing in number — and stature.

Cetera brokers may go elsewhere with no stay bonuses on horizon

Some may feel spurned and leave, while others will simply shrug off latest slight and stay.

Fidelity backs away from being 'point in time' fiduciary for 401(k) plans

Some advisers think this indicates other providers will pivot in light of DOL fiduciary rule's death.

Morgan Stanley CEO is happy that brokers are staying put

Firm has seen little attrition since it dumped the broker protocol last fall, Gorman says.

Bills to reform adviser regulation, increase sophisticated investors and protect seniors pass House

Measures included in package of 32 bipartisan bills meant to ease rules, spur investment

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print