SEC Finds Widespread Deficiencies Among Robo-Advisors

Nearly all of the examined advisors received a deficiency letter, with observations most often noted in the areas of:

• compliance programs, including policies, procedures and testing;
• portfolio management, including, but not limited to, an advisor’s fiduciary obligation to provide advice that is in each client’s best interest; and
• marketing/performance advertising, including misleading statements and missing or inadequate disclosure.

For instance, the SEC 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 based on the client’s objective, or adopted policies and procedures that were inadequate or not followed.

“A review of practices revealed that, while advisers commonly used questionnaires to collect client data, some firms relied on just a few data points to formulate investment advice,” the alert states. “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.”

Further, many advisors “did not periodically evaluate whether accounts were still being managed in accordance with the clients’ needs, such as by inquiring about any changes in their financial situation or investment objectives or having clients update or retake their questionnaires,” the alert states.

The exam also found that more than one-half of the advisors had advertisement-related deficiencies.

For example, the staff observed that the advisors:

• made misleading or prohibited statements on their websites, such as: using vague or unsubstantiated claims that could cause an untrue or misleading implication or inference to be drawn regarding the advisory services provided, investment options available, performance expectations, and costs incurred in investing (e.g., a comparative analysis of adviser-offered versus other products and services);
• misrepresented Securities Investor Protection Corp. (SIPC) protections by implying that client accounts would be protected from market declines;
• used press logos (e.g., ABC, CNN, Forbes) without links or disclosure that would explain their relevance; and
• referred to, or provided links to, positive third-party commentary, without disclosing the relevance, any conflict of interest (e.g., advisor compensation), or both.