Robo-Advisers Still Have the Same Compliance Obligations as Traditional Firms

 

 

The issue of robo-advisers (and the potential regulatory consequences of an adviser that relies heavily on automation to achieve what was traditionally achieved through human interaction) is nothing new. In fact, electronic investment advice has been a continuous SEC top priority exam list in recent years. However, scrutiny has been building year over year as the popularity of modern automated investment tools appears to be reaching something of an apex.

 Robo-Adviser Compliance Obligations

 

Robo-advisers seem to come in two distinct categories — traditional firms that are familiar with compliance issues and understand what needs to be done to maintain compliance, even in the context of this new technology, and tech-based firms that are new entrants to the field and know little about what compliance issues even exist, let alone how to address them.

The simple fact is that robo-advisers are simply registered investment advisers who happen to use modern technology to provide investment management services to their clients, and as such, they are treated no differently by the SEC and other regulatory bodies than the traditional adviser.

Robo-advisers, which we've written about before and were a topic of some concern at the 2018 Investment Adviser Compliance Conference, are part of a larger global trend — the use of technology to reduce overhead, increase profitability, and simultaneously provide a higher level of service to clients.

In the financial industry, this often leads to a reduction in staff and the ability of existing staff to achieve more in a smaller amount of time, but it also presents some serious potential compliance pitfalls for a simple reason — as in many other industries, the technology being used to automate many once-human-driven processes is still in the early stages of development, is still, in many ways, untested, and still requires close monitoring by a staff member to ensure mistakes are avoided.

 

Robo-Advisers Need to Keep a Close Eye on Regulatory Concerns

Though there are many regulatory concerns when it comes to robo-advisers and their practices (you can read more about those concerns in the full SEC IM Guidance Update from last year), perhaps the primary concern has to do with the substance and presentation of disclosures, a subject fraught with misunderstanding and compliance pitfalls. even for firms that provide non-automated advisory services. The issue is one that has been plaguing the world at large as automation finds its way out of the world of industry and into the world of customer service and direct customer interaction. Just getting the average person to read the terms and conditions of a purchase is an issue businesses around the world have struggled with for decades.

Most traditional advisers are well aware of this issue, but more importantly, are mindful that they have an obligation to ensure their clients not only receive the proper information necessary to make an informed investment decision, but that this information is presented in such a way that clients are likely to read that information and understand it.

Clearly, the bar is set higher when a robo-adviser is limiting human interaction. Presenting such information in a written format on, for example, a website, might not be enough to ensure a client understands what they’re getting into, especially since they don’t have the ability to ask questions. Robo-advisers of the present and future may need to take creative steps to ensure their clients receive and understand disclosures properly.

Disclosures are Only One Consideration for Robo-Advisers

Though disclosures are very important and must be scrutinized, there are many other compliance issues that robo-advisers may run across. See the full IM Guidance Update on the subject and learn more about compliance issues that robo-advisers need to consider. Core Compliance can assist firms with drafting disclosures and implementing appropriate compliance protocols surrounding robo-adviser platforms. For more information, please contact info@corecls.com or (619) 278-0020.

  

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