US regulator finds issues with digital advice

Mike Taylor

Managing Editor/Publisher, Financial Newswire

15 November 2021

At the same time the Government is looking to digital technology  to bring down the cost of financial advice, the US Securities and Exchange Commission (SEC) has written a ‘deficiency letter’ to almost all digital investment advisers.

According to a report in US publication, Financial Advisor, the SEC said it sent a deficiency letter to “nearly all” of the advisors examined., with examiners observations most often centring on compliance programs, portfolio programs, robo-advisors’ fiduciary duty to provide advice in each clients’ best interest and marketing and performance advertising.

The report quoted the SEC letter as stating: “When robo-advisers fail to comply with their regulatory obligations… investors may experience poor outcomes”.

It said that could include where digital advice offerings don’t “appropriately capture a client’s risk tolerance [and] it could result in advice to invest in securities that are not aligned with the client’s best interest”.

“Similarly, if a robo-adviser is programmed to act on conflicts of interest that raise the costs or decrease the quality of the services provided, the client may be harmed as a result of the adviser’s putting its own interests ahead of its client,” it said.

The report said the SEC had found that robo-advisors either lacked written policies and procedures that would allow the firms to develop a reasonable belief that the investment advice being provided to clients was in each client’s best interest or adopted policies and procedures that were inadequate or not followed.

It reported that some firms relied on just a few data points to formulate investment advice and suggested “this raised the concern that the questions did not elicit sufficient information to allow the adviser to conclude that its initial and ongoing advice were suitable and appropriate for that client based on the client’s financial situation and investment objectives”.