How are robo-advisors regulated?

[Sam Button]

[Steve Walters]

Robo-advisors are a fairly new development, having been around for just over a decade after being introduced by Wealthfront Advisors in 2008. Because they are so new, many people wonder about their trustworthiness and robo-advisor regulation. In the U.S. robo-advisors must register with the Securities and Exchange Commission (SEC). They are subject to exactly the same security regulations and laws as traditional human advisors and broker-dealers. Nearly all robo-advisors are members of the Financial Industry Regulatory Authority (FINRA), which is the same self-regulatory organization responsible for regulating every financial institution. Any user or prospective user of robo-advisor services will probably be happy to know oversight of this new advising service is just as strong, if not stronger than the oversight that banks, stockbrokers and insurance companies receive. Robo-advisors rely heavily on digital advertising for client acquisition, onboarding and account management. This improves efficiency for the robo-advisor firms and their clients, but because this digital focus is central to the robo-advisory business, it is also the primary focus of regulators. Robo-advisors rely on the potential cost savings and advantages in performance as selling points for their service. They post this information on various social media sites and online blogs, and this has been a concern of regulators, who continually monitor the digital marketing efforts of robo-advisors to ensure they are truthful and in compliance with all current regulations. Robo-advisory firms have the same stringent regulations to provide a fiduciary standard of care for their clients, even if there is no human interaction between the robo-advisory firm and the client. The Securities and Exchange Commission (SEC) has been publishing guidelines for robo-advisors since February 2017 and has also been clear about its intent in closely monitoring robo-advisory firm activities. That’s why there was little surprise from industry watchers when the SEC issued its first two enforcement actions against robo-advisors in December 2018. It’s ironic though that one of those charged was Wealthfront Advisors, the same firm credited with the creation of the robo-advisor class of service. The SEC settled charges with the company, and also settled charges at the same time with Hedgeable Inc., a New York City-based firm that has been registered as a robo-advisor since 2009. They charged both firms with fraud and violating the Compliance Program Rule, which requires advisory firms to have a compliance program installed that has all the process necessary to ensure the advisor completely complies with all applicable regulations and laws. They also charged Wealthfront with providing false or misleading testimonials and for providing cash payments to their online affiliates. Hedgeable was additionally charged withTop of Formdisseminating false and misleading material and performance data. I think these first enforcements make it clear robo-advisors are subject to the same regulations and laws as any other financial organization.