With a single swipe of a mobile screen or a simple click of a mouse, an investor today can access a range of automated investment tools, including robo-advisers – investment management programs that select and manage individual investment portfolios. These algorithm-driven digital tools provide investment advisory services to consumer often without any human-to-human interaction. They promise low cost, ease of use, and broad access – they’re in your pocket on your cell phone, a gesture away.
Over the last year, the use of robo-advisers has grown rapidly and expanded beyond the initial market base of millennials to individuals from all walks of life. In response to this rapid growth and the unique issues raised by automated investment advice, in February this year, the SEC issued a series of publications focusing exclusively on these innovative investment creatures: a Guidance Update for investment advisers and an Investor Bulleting for investors. As the SEC Acting Chairman Michael Piowwar pointed out in February’s Press Release, technological innovation is rapidly changing the financial services industry and regulators are seeking to both “give thoughtful guidance to market participants” and “help investors tap into the opportunities that fintech innovation can provide while ensuring fairness and investor protection.”
The issued Guidance sets forth some of the key legal challenges facing investment advisers who have incorporated automated investment advice into their workflow and provides suggestions on how to meet their legal obligations under current law. The accompanying Investor Bulletin on the other hand identifies potential pitfalls of these apparently simple tools from the perspective of an investor and provides tips on how to navigate this new technological landscape. Both publications followed the Commission’s Fintech Forum held Nov. 14, 2016 examining innovation in the financial services industry. The Forum included a panel discussion focusing exclusively on robo-advisers and their impact on investors.
Considering the recent buzz surrounding the unique issues raised by automated investment advice, this blog series examines the nature of robo-advisers, the key legal issues raised by their use, essential tips for investors using automatic investment services, and some of the pros and cons of automated investment advice.