SEC guidance on roboadvice
By C. Todd Gibson and Michael W. McGrath
The US Securities and Exchange Commission’s staff has published information and guidance for investors and the financial services industry on the fast-growing use of “robo-advisers,” a catch-all term for investment advisers that use computer algorithms to provide investment advisory services online, often with limited human interaction. In light of the unique issues raised by robo-advisers, the SEC’s Division of Investment Management issued a Guidance Update on 23 February 2017 for investment advisers with suggestions on how robo-advisers can best comply with disclosure, suitability and compliance obligations imposed by the Investment Advisers Act of 1940. A second publication, an Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy, provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.
The Investor Bulletin describes a number of issues that investors should consider, including:
- The level of human interaction and its importance to the investor
- The information the robo-adviser uses in formulating recommendations
- The robo-adviser’s approach to investing
- The fees and charges involved
Investors can use the SEC’s Investment Adviser Public Disclosure (IAPD) database, which is available on Investor.gov, to research the background of any investment adviser, including registration or license status and disciplinary history. This includes robo-advisers, which are typically registered as investment advisers with either the SEC or one or more US state securities authorities.