A review of U.S. investment advisory firms’ robo-services found widespread deficiencies tied to areas such as those firms’ compliance programs as well as their oversight and disclosure practices.
In a new report detailing the results of compliance reviews at advisory firms that provide electronic advice, the U.S. Securities and Exchange Commission (SEC) found shortcomings within almost all of the firms reviewed.
“Nearly all of the examined advisers received a deficiency letter,” the SEC said.
The most common issues involved firms’ compliance policies, procedures and testing, plus their portfolio management, and their marketing/performance advertising (including misleading statements or inadequate disclosure).
Among other things, the regulator’s reviews found that many advisers “were not testing the investment advice generated by their platforms to clients’ stated or platform-determined investment objectives or otherwise satisfying their duty of care.”
Firms also lacked policies and procedures to ensure that the advice being generated by their robo services were in their clients’ best interest. Additionally, firms that had adopted those policies weren’t necessarily following them.
“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 SEC said, noting that this raised a concern that firms’ KYC practices weren’t robust enough to generate appropriate advice.
The review also found that more than half of the firms reviewed had advertising-related deficiencies, such as using “unsubstantiated claims” that could mislead clients about their investment options, performance expectations and the costs of investing.
It also found inadequate disclosure of conflicts of interest and misrepresentations about contingency fund protections, implying that accounts would be protected from market declines.
As a result of the reviews, some firms revised their disclosures and marketing materials, enhanced their compliance policies and procedures, and improved data protection practices, among other changes, the SEC said.