SEC Chair Gary Gensler is once again speaking out about robo advisors and fintech brokerages, expressing concerns about the potential conflict of interest in those algorithm-driven platforms.
Speaking at the North Americans Securities Administrators Association
“When investment professionals offer advice or recommendations, including when they are using DEPs, our standards are clear — they must not place their own interests ahead of the investor’s interests,”Gensler said.
Gensler compared the “options trading” button in some self-directed brokerage apps to “gummy bears in the shopping cart” and questioned their investor protection compliance.
“The nature of certain steers raises questions between what is and isn’t advice or a recommendation,” he said.
Gensler’s recent speech is rehashing his concerns about robo advisors, which experienced significant growth in the last year, according to
While it might be possible for robo advisory firms to use digital engagement practices to promote themselves in ways that introduce conflicts of interest or biases, it may be a case of a solution in search of a problem, said Scott Smith, director of advice relationships at Cerulli.
“As far as ‘robo advisors’ go, his (Gensler’s) concerns are certainly valid, but I don’t think we have seen any of the real areas of harm implemented or really considered,” Smith said.
Robo advisors, which generally take answers from a risk tolerance questionnaire and then map the results to a portfolio of low-cost ETFs, have recently drawn significant attention from regulatory entities. In February, the SEC charged New York-based robo advisor Wahed Invest LLC with making misleading statements and breaching its fiduciary duty, and for compliance failures related to its Shari’ah advisory business.
“Robo-advisors, like other advisors, must ensure that their marketing materials are not misleading and that conflicts are disclosed to investors,” Adam S. Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit, said
Last November, the SEC published a
“If, for example, a robo advisor’s client survey process does not appropriately capture a client’s risk tolerance, it could result in advice to invest in securities that are not aligned with the client’s best interest. Similarly, if a robo advisor 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 advisor’s putting its own interests ahead of its clients,” according to the alert.
David Goldstone, manager of investment research at Condor Capital Wealth Management, said the issue that SEC is concerned about is not necessarily robo advisors themselves, but the speculative actions investors are encouraged to take on the new fintech platforms, which make money depending on the frequency of trading.
“I don't know if everyone has the knowledge base and the experience that they necessarily should be trading options,” he said. “It is the behavioral push of individual investors to do more speculative, more frequent trading that is probably a larger concern than to make regular contributions to your account and to manage portfolios through a robo advisor.”
Goldstone also said the SEC is not likely to shut down all robo advisors, as that would prevent a lot of individual investors who cannot afford traditional advisors from accessing financial products.
Despite rehashing its cautious stance on robo advisors and the self-directed trading platforms, the SEC has yet to take any concrete measures, apart from addressing the regulations that are already in place.
“Brokers and advisors have a critical role to play in all of this. Disclosure is important ,but not sufficient when it comes to acting in a retail investor’s best interest,” Gensler said. “Firms need to take investor protection and compliance obligations seriously, reining in or curing any conflicts and really delivering the best interest advice that investors so need and deserve.”
