Robo-advisers aren’t acting in client interests, SEC says

Robo-advisers tout their transparency of fees and pro-consumer approaches, but the Securities and Exchange Commission (SEC) found that many were misleading clients through their advertising and not acting in clients’ best interests.

Why should we care?
The SEC sent deficiency letters to most robo-advisers, highlighting compliance and portfolio management issues, and problems with performance advertising and marketing. In addition, the regulator claimed robo-advisers’ algorithms did not assess whether investment advice aligned with client interests. Other deficiencies noted included a lack of written compliance policies non-disclosure of conflicts of interest. “When robo-advisers fail to comply with their regulatory obligations, however, investors may experience poor outcomes,” the SEC said. This could happen if the robo-adviser client survey processes don’t “appropriately capture a client’s risk tolerance, [and] could result in advice to invest in securities that are not aligned with the client’s best interest.” Given that the report shows mass non-compliance, it raises the question of whether the rules are effective, one industry practitioner quoted in a trade publication said.