Robo-Advisers: A Fast Growing Trend

Contact: Daniel D. Hill

or a number of reasons, Robo-Advisers are a fast growing trend.  Among other things, they provide retail investors with more affordable access to investment advisory services.  As a result, they are also causing changes to the competitive landscape of investment advisers.  If you or your firm is using, or is considering using Robo-Advisers, be aware they are, like any other RIA, subject to the substantive and fiduciary obligations of the Investment Advisers Act.

Broadly speaking, Robo-Advisers provide discretionary asset management services through the use of algorithmic-based programs.  A client who wishes to use a Robo-Adviser enters personal information and other data into an interactive, digital platform.  Based on the information entered, the Robo-Adviser generates a portfolio for the client, and thereafter monitors and manages the account.  Some Robo-Advisers involve little to no human interaction, while they are also used by traditional advisers as another resource.

Although a relatively recent innovation, the SEC has not failed to provide guidance for the use of Robo-Advisers.  In particular, the SEC has issued written guidance which suggests that those using Robo-Advisers focus on at least three distinct areas.  First, it is critical to pay close attention to what disclosures are made to Robo-Adviser users, when and how those disclosures are presented.  Second, users of Robo-Advisers should also recognize their obligation to collect accurate and sufficient information from the client to ensure that a resulting portfolio is suitable.  Third, users of Robo-Advisers need to ensure their compliance programs are reasonably designed and updated to address the unique concerns presented by automated advice.

In both a written Guidance and also a subsequent Update publication, the SEC provides more detailed information on how to be compliant when using Robo-Advisers.  If you would like direction to those publications, they are available online, or you can contact me.

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