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.”

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