SEC provides robo-adviser guidance

Regulator warns automated platforms to be transparent on algorithms and consumers to ask a lot of questions before choosing one, but stops short of issuing new rules

Feb 23, 2017 @ 5:04 pm

By Liz Skinner

Federal securities regulators warned robo-advisers to be overtly clear with the public about how their algorithms recommend portfolios and asked them to consider whether their questionnaires really ask for enough information to give advice that's in clients' best interests.

The Securities and Exchange Commission guidance update Thursday said robo-advisers operate under a broad range of business and service models, including those that provide some live advice, but all must follow investment adviser rules that include operating as a fiduciary.

In a second bulletin directed at consumers, the commission recommended investors research digital-advice providers like they would any other financial service firm, including asking whether they would have a person to speak with during a market event or downturn.

"This information is designed to help investors tap into the opportunities that fintech innovation can provide while ensuring fairness and investor protection," said Michael Piwowar, SEC acting chairman, in a written statement.

(More: Robo-advisers and human advisers adopt each others' biggest advantages)

The SEC guidance to advisers comes three months after the commission hosted a forum of financial technology experts to discuss the impact digital-advice providers and other innovations are having on investment advice and other financial services. SEC staff said then they were considering whether further guidance, or even new rules, were needed to protect investors.

No additional rules were suggested in the documents Thursday, though the SEC staff wrote that it will continue to monitor fintech innovations and seek any needed safeguards for investors.

Last month, the SEC included robo-advisers on its annual list of adviser examination priorities, a first for the agency.

Digital-advice providers attracted about $83 billion in client assets through the end of 2016, according to Cerulli Associates. The researcher projects the market will grow to about $385 billion by the end of 2021.

In its 15-page guidance update, the SEC recommends several times that robo-advisers use design features, such as tool-tips or pop-up boxes to clearly convey information or warnings to clients, such as when information provided by the client is inconsistent with previous information they entered.

It also recommended describing any risk inherent in using algorithms to manage accounts and any conflicts of interests with third parties. Robos also should be careful not to mislead clients, such as by presenting a tax-loss-harvesting service as providing comprehensive tax advice, it said.

The SEC investor bulletin recommended paying close attention to whether any human advice offered as part of the robo-service is aimed at answering investing and portfolio questions or at providing technical support. It suggested asking whether the robo-platform's investment strategy takes into consideration all the client's assets and debts.

(More: When it comes to investment returns, not all robos measure up)

In addition, it suggested making sure one understands the total costs of using robo-advisers, which generally offer cheaper service than traditional firms staffed with live advisers.

"A robo-adviser may offer lower-cost investment advice, but if the robo-adviser utilizes investment products with high costs, your total overall costs could still be high," it said.

Kate Wauck, a spokeswoman for robo adviser Wealthfront, said the bulletin for consumers is a "step in the right direction to help consumers ask the right questions when evaluating not just robo-advisers, but any adviser."

She notes that Wealthfront publishes all its white papers on its website to answer many of the questions the bulletin suggests clients should ask advisers.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Nov 13

Conference

Best Practices Workshop

For the sixth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

Events

Transamerica's Boan: Crafting better retirement income conversations

Retirement income is a challenge for investors. How can advisers have better conversations about retirement income? Transamerica's Joseph Boan offers insights and tips for advisers.

Latest news & opinion

What's in a name? For TCA by ETrade, everything

Trust Company of America is gone, and there's big buzz over the name change. But turning the custodian into an industry powerhouse will take a lot longer — if it happens at all.

When it comes to regulating AI in financial services, murky waters are ahead

Laws are unclear on how the technology fits in with compliance.

As Ameriprise case shows, firms on hook when brokers go bad ​

The SEC will collect $4.5 million from the brokerage firm for failing to supervise brokers who were ripping off clients.

10 highest paid professions in America today

These are the top-paying jobs in the U.S., according to Glassdoor.

Ameriprise to pay $4.5 million to settle SEC charges that five reps stole more than $1 million from clients

Agency censures firm for not protecting clients from thieving brokers.

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