© 2020 Arizent. All rights reserved.

Is Compliance Keeping Up With Your Automated Advisory Tools?

Register now

Automated advisory tools such as account aggregation, portfolio analysis and financial planning systems are being touted for their ability to increase productivity while allowing advisors to collaborate more easily with clients. 

Included in many next generation toolkits, robo advisors rely on algorithms and model portfolios to automatically align client portfolios with risk tolerance and other predefined thresholds.  

Given the introduction of these and other automated advisory tools, investment advisors, broker-dealers and compliance consultants must implement compliance best practices to help mitigate areas of risk that technology — like a double-edged sword — can both cause and combat.  

Here's a summary of compliance technology best practices.

  • Maintain compliance manuals that account for all digitized advisory tools the advisor has in place
  • Document and mitigate potential conflicts in relationships with services providers
  • Maintain disclosures, including records of fees and expenses
  • Log all client and prospect presentations and communications (meetings, calls and online)
  • Maintain records of cyber-security policies, procedures and capabilities
  • Keep track of personal security transactions of officers and supervised personnel
  • Maintain policies and procedures with time-stamping of all changes to keep them current and audit-ready

Technology is here to stay, not only because of the productivity and relationship management enhancement it affords, but because investors have grown to expect automation as part of their service experience.  
Ric Lager, president of Lager & Company, which specializes in providing investment advice to individual company 401(k) retirement plan participants, has successfully used automated advisory tools throughout the advisory relationship, from client on-boarding to portfolio rebalancing. 

"These days, it would be unexpected to shun technology given that it lets advisors scale support so we can reallocate time to valuable activities that can't be automated, such as sensitive client conversations about lifestyle changes," Lager explained.

Investment advisors, broker-dealers and other financial services providers that sponsor or use automated investment tools should heed regulators' recent admonishments of the risks involved.  In a May 2015 Investor Alert, the SEC cautioned investors to pay close attention to several key areas of risk before using automated investment tools.  A major area of regulators' concern vis-à-vis automated investment tools is cybersecurity.  Tool sponsors often collect personal information, which can sometimes be compromised. 

Regulators are also urging investors to be fully aware of terms and conditions when using automated investment tools, including associated fees, compensation or expenses. Yet another concern relates to the inherent limitations of digitized tools to shift underlying assumptions on-the-fly. This could present a problem if, for example, an investor's circumstances or market movements shift, but preprogrammed assumptions used by the digitized tools have not been updated.


Relying on automated tools devoid of human interaction would be akin to putting an airplane in autopilot, then hoping to come in for a safe landing without actively navigating to the ground.  Like Wells Fargo, many firms feel they can best guide their clients' course by balancing automation prudently with human interaction.  For instance, in May, Vanguard announced the launch of its hybrid Vanguard Personal Advisor Services, which combines robo advisor technology with human advisory services.

To whatever extent advisors are embracing technology, and for whatever reasons, advisors must ensure they have compliance programs that account for risk that digitized tools can introduce to their practice, including but not limited to style drift. If and when examiners come to call, they will scrutinize the policies and procedures a firm has in place to mitigate technology-induced exposure. 

"Advisors need to make sure their compliance vendors and compliance management tools are as cutting-edge as their portfolio construction and monitoring software," Lager added. 

Regulators seem to agree that technology could be put to work to help manage compliance. In a recent enforcement action against a global financial services firm, SEC Director of Enforcement Andrew J. Ceresney said: "Today's high-speed markets require that broker-dealers and investment advisers manage the convergence of technology and compliance."   


Next generation compliance tools can work in parallel with digitized advisory tools, with alarms and reminders that can be time-stamped as an audit trail of which actions are taken when and by whom.  The integration of tools that deliver an enterprise view of compliance tasks helps firms manage digitized and traditional investment management activities more easily, efficiently and effectively. 

Financial firms that rely on digitized investment tools would be well-advised to conduct periodic assessments of them, quasi A-B testing to evaluate how well performance outcomes are meeting client goals.  Periodic testing should include cyber-security checks to safeguard operations and information as well as ongoing assessments that show business-specific policies and procedures are being actively managed. 

Clearly, digitized advisory systems are here to stay. By leveraging automated compliance tools at the same time, advisors are better positioned to demonstrate to both investors and regulators, should the need arise, that they are making a proactive best effort to mitigate risk that technology itself can introduce.

Carlos Guillen is president and CEO of BasisCode Compliance.

Read more:

For reprint and licensing requests for this article, click here.