By: Phil Kernen

Sometimes you get what you pay for.  Those words came to mind after reading a recent report from the Securities and Exchange Division of Examinations. Recognizing the growth of digital investment advisory services, a/k/a robo-advisors, they reviewed a series of examinations to assess advisors who provide robo-advisory services. For clients of such advisors, what they found should be required reading.

In 2018 fines were levied against two robos, Wealthfront and Hedgeable, over false disclosures related to their investment performance.  In early 2021, Charles Schwab was fined $200 million due to a lack of disclosures on how it allocates portfolios and collects revenue which created conflicts of interest. The action led to an industry-wide review of operations by the SEC and the report was released in early November, 2021.

The report revealed that nearly all the examined advisors received a deficiency letter, which sounds like what it is. The greatest concentration of deficiencies occurred in compliance programs, marketing/performance advertising, portfolio management, and discretionary investment advisory programs. It suggests the fines above hasn’t done much to change the behavior of robo-advisors.

Compliance programs

Most advisors had inadequate compliance programs, usually resulting from a lack of written policies or insufficient guideline adherence.  Specifically, they lacked appropriate guidance to address whether algorithms performed as intended or whether asset allocation services worked as disclosed. They didn’t test the protection of client assets by managing the availability of client credentials such as pins and passwords.

Over the course of 35 years and three separate SEC audits we have learned one fact about auditor priorities – process and policy are requirements for client protection.


Due to the lack of policies, many advisors did not detect inadequacies with their marketing and performance advertising practices.  More than one-half of the advisors had advertisement-related deficiencies. Problems included vague or unsubstantiated claims that could lead to incorrect, incomplete, or misleading conclusions. Or using press logos such as ABC, CNN, or Forbes without links or disclosures to explain the relevance, and leading to the impression of an endorsement that does not exist.

Or misrepresenting Securities Investor Protection Corporation (SIPC) protections by suggesting client accounts were insured from market declines.  The SIPC protects investors up to $500,000, but only if a broker-dealer fails in their custody function. There is no protection for the market value of your investments.

Robo-advisors used materially misleading performance advertisements on their websites, such as advertising that included the performance of a hypothetical investment model applied retroactively. GIPS, or the Global Investment Performance Standards, do not allow this practice because it is misleading. Finally, they were unclear about human services available or whether that incurred an extra cost.

Portfolio Management 

Many advisors were not testing the investment advice generated by their platforms. They lacked policies to determine whether the investment advice was appropriate for client objectives.  Or whether the advice was in the best interests of the client; many firms collect too few data points to draw an informed conclusion. And many firms did a poor job of periodically evaluating whether accounts were managed according to client needs. In too many cases, it was set-it-and-forget-it.

Discretionary Investment Advisory Programs

Where advisors offered discretionary investment programs, providing each retail client with individualized treatment, those robo-advisors often employed the same advice across many of their clients. Further, many advisors prohibited the application of any restrictions, such as designating certain types of securities to sell if held or not to buy in the first place.  Other advisors made it extremely difficult to set restrictions at all. In the eyes of these advisors and their algorithms, your discretionary management is no more unique than the next client.

Using a robo-advisor relies on the underlying belief that technology offers a better solution.  However, humans are the brains behind the technology.  When they allocate insufficient resources to the compliance responsibilities of managing your money, how much attention is devoted to the inner workings of the algorithm that puts your money to work? Sometimes you get what you pay for.