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Regulators Tighten the Reigns on Robo Advisory Firms

In December 2018, the US Securities and Exchange Commission (SEC) settled an enforcement action with Wealthfront, one of the industry’s leading robo advisors. This came after Wealthfront made false statements about its software’s ability to implement a ‘tax-loss harvesting’ strategy. Wealthfront failed to properly execute the strategy, resulting in losses to a significant number of clients. Wealthfront ultimately agreed to pay a $US 250,000 penalty.

As this case demonstrates, regulators are beginning to take a closer look at whether digital advice firms are delivering on their promises to clients. As the regulators gain a greater understanding of how robo advisors operate, they can apply a higher degree of scrutiny to the algorithms that underpin the financial advice. The algorithms, which were once perceived as a business function, are now being tested in order to ensure that they meet their compliance obligations.

This is of particular importance, given the recent influx of funds to robo advisory firms. In Australia, both established and start-up Australian Financial Services Licensees (AFSL) are adopting digital advice models. This is a global trend, with estimates suggesting that in the US, total assets under management on digital platforms will reach $US 1 trillion by 2020.

In August 2016, the Australian Securities and Investment Commission (ASIC) released RG 255, which sought to address some of the regulatory concerns that many robo advisory firms held. ASIC flagged that it would focus on financial advice providers’ ability to:

  • understand the technology and algorithms;
  • review the digital advice generated; and
  • implement procedures to test and monitor the underlying algorithms.

ASIC has announced publically that it intends to take a tougher stance on AFSL holders. In the wake of the recent Royal Commission, digital advice firms need to ensure that they are complying with their regulatory obligations.

This post was also written by Andrew Fay.

Copyright 2020 K & L GatesNational Law Review, Volume IX, Number 94



About this Author

Jim Bulling, KL Gates, financial services lawyer, funds management attorney

Mr. Bulling's practise focuses on banking and financial services and he acts for a range of entities in the financial services and funds management industry. His clients include Australian and international investment managers, banks, trustees of superannuation funds, wholesale and retail investment trusts, funds management companies and financial planning groups.

His main areas of focus include banking and financial product disclosure issues, financial services compliance issues, financial product distribution issues and superannuation and...

Felix Charlesworth, KLGates, Financial attorney

Mr. Charlesworth is a commercial and regulatory lawyer with a focus on the financial services industry.

 Mr. Charlesworth advises on a range of regulatory and compliance issues relevant to wholesale and retail fund managers, financial advisers, superannuation fund trustees and other financial services entities. He also has experience in advising multinational corporations about compliance measures targeted at the prevention of bribery and corruption.