Episode 98: Robo-Advisers: Compliance Considerations and Regulatory Focus

On episode 98 of the CCO Buzz, we’re joined by Sr. Compliance Consultant Maggie Tavares to discuss common compliance failures related to robo-advisers, as well as the heightened regulatory focus on robo-advisory in recent years.


CCO Buzz: Hello and welcome back to the CCO Buzz! We hope everyone is continuing to enjoy their summer, we know we sure did on our brief hiatus last month. But now that we’re rested and relaxed – our team is ready to hit the ground running for a strong end to 2022. To kick off our return we’re joined by Senior Compliance Consultant Maggie Tavares. She’s here to discuss her latest Risk Management Update, “Robo-Advisers Are Not Immune from Compliance Failures,” as well as to unpack the heightened focus on robo-advisory in recent years due to the influx of the industry’s technology demand and dependence.

With that, let’s begin…

In reference to the industry, when do you think regulatory agencies started to focus on robo-advisory offerings? And what have been reoccurring deficiencies they’ve found?

Maggie Tavares: Well, I think the industry began to feel regulator focus really in 2018. Since then, I think enforcement has tried to navigate the technology landscape and service at every step of its evolution.  Some of the most common deficiencies I’ve seen surround the need or the lack of adequate disclosures – yes, disclosures.

Additional violations pertain to the dissemination of marketing materials that contained false and misleading information regarding the performance or product offerings associated with the robo-adviser platform, as well as the failure to adopt and implement adequate written policies and procedures.

CCO Buzz: It’s interesting that you say that trending violations have a common thread of disclosure, can you elaborate?

Maggie Tavares: Of course. When I note disclosure, it’s more so along the lines of disclosure of conflict of interest. Specifically, robo-advisory firms will want to assess their disclosures for conflict of interests, including:

  • Financial incentives to recommend or include certain investment offerings;
  • Using affiliates to provide certain services connected to the robo-adviser platform; and
  • Using proprietary investment products

CCO Buzz: Hmm…one thing that I can say on behalf of the industry is that, with such a transformative and evolving landscape, especially with technology and robo-advisory, it’s difficult to navigate all the current and upcoming regulatory requirements. Could you provide listeners, and myself, with some brief insight on a few best practices?

Maggie Tavares: Heard you, and the industry, loud and clear. In my article from last month, we discuss a handful of best practices when it comes to robo-advisers. I don’t mind sharing a bit with listeners, but for more, you’re going to have to check out the article.

Hmm, ok…

One tip me and my team always encourage clients to do, is review any and all recent SEC guidance. The SEC periodically issues written guidance on various compliance topics to help firms understand requirements, which can be found on their website at sec.gov. For example, a Risk Alert released in November of last year, concentrated on various compliance deficiencies found during routine exams of investment advisers that provide electronic investment advice.

Another tip would be to perform Conflicts of Interest Assessments. While hyper focused, it is necessary to understand the undertaking of technology. Firms should review all areas of business to determine the actual and potential conflicts surrounding the firm’s robo-adviser services. Examples include, advisory fees and other compensation, use of affiliates, referral arrangements, trading and best execution, handling trade errors, revenue sharing arrangements, personal trading by employees, soft dollar arrangements, gifts and entertainment, and employees’ outside business activities. Assessments should be performed at least annually and documented to reflect all identified conflicts and how the firm addresses each conflict.

For more tips, listeners will just have to check out my article.

CCO Buzz: Oh Maggie, you know I love a good article tease. Thank you so much for joining us for today’s episode. Before we sign off, is there anything else you’d like to share with our listeners?

Maggie Tavares: Oh it was my pleasure, really – thank you for having me. And yes, two things… first, if you or your firm have any questions regarding your compliance program or how to navigate robo-advisory compliance – don’t hesitate to reach out to me or the team at Core Compliance. Together we can assess your compliance program and find the right solutions for your firm. You can contact us at 619.278.0020 or at www.corecls.com. And second, as you enjoy the rest of your summer don’t forget to reapply your sunscreen!

CCO Buzz: Yes, great tip! Listeners, always reapply your sunscreen. Enjoy the rest of the summer. And Maggie, always a pleasure. Thanks.

Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.


Leave a Reply

Your email address will not be published. Required fields are marked *