SEC/FINRA Issues Alert on Robo-Advisors
The SEC’s Office of Investor Education and Advocacy, together with FINRA, have issued an “Investor Alert” to warn investors about the limitations and risks of automated investment tools, including robo-advisors. The Alert cautions that outputs “may not assess all of your particular circumstances” including other holdings, tax situation, and risk tolerance. The Alert also advises that online tools may have inherent programming limitations that utilize “economic assumptions that will not react to shifts in the market.” The Alert also reminds investors that the output is only as good as the input and that investors must seek clarity on vague input questions. The Alert also warns against opaque fee/expense disclosure and phishing scams. Regardless, the regulators do acknowledge that such tools offer significant benefits including low cost, ease of use, and broad access.
OUR TAKE: Firms that sponsor or utilize automated investment tools should consider the Alert’s warnings as guidelines to create a compliance program with the knowledge that the SEC/FINRA will review these issues during exams.