Robo-advice alert issued in the US


Financial regulators in the US are warning investors and advisers to beware the limitations of automated investment tools.

Generic economic assumptions, framed questions and de-personalised recommendations that do not properly take into account changing circumstances or investment time horizons are among the concerns identified in an alert issued by the Securities and Exchange Commission and Financial Industry Regulatory Authority.

Automated investment platforms are part of the ‘robo-advice' sector in the US, though they are also being used by client-facing advisers as supplementary tools to guard against losing business to the traditional robo-advice giants, such as Betterment and Wealthfront.

Robo-advisers, described as a "class of financial adviser that provides portfolio management online with minimal human intervention" is a growing and not insignificant industry in the US, with the likes of Wealthfront running more than $2bn of investors' money.

But it remains in its infancy in the UK and Europe.

Online simplified advice propositions such as Wealth Horizon, which uses Parmenion's Interact software, have come to market, but Interact is still otherwise at the pilot stage and is yet to be made widely available to adviser firms. Moreover, wealth managers Investec Wealth & Investment and Towry have indicated forays into the space.

However, analysts have suggested uncertainty remains in the UK around offering simplified advice, and downplayed the impact it could have on larger wealth management propositions should it ever take hold. Numis, for example, said it "implausible" that UK robo-advice will have any operational impact on incumbents such as Hargreaves Lansdown and St James's Place.


Automated advice concerns

Definition from US regulators: "These tools range from personal financial planning tools (such as online calculators) to portfolio selection or asset optimisation services to online investment management programs (such as robo-advisors that select and manage investment portfolios)."

1 Be aware that an automated tool may rely on assumptions that could be incorrect or do not apply to your individual situation. For example, an automated investment tool may be programmed to use economic assumptions that will not react to shifts in the market.

2 Which questions the tool asks and how they are framed may limit or influence the information you provide. Be aware that a tool may ask questions that are over-generalized, ambiguous, misleading, or designed to fit you into the tool's predetermined options.

3 An automated investment tool may not assess all of your particular circumstances, such as your age, financial situation and needs, investment experience, other holdings, tax situation, willingness to risk losing your investment money for potentially higher investment returns, time horizon for investing, need for cash, and investment goals.


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