Three US robo-advisors are paying the price for misleading client acquisition tactics. Truth twisting has been punished by regulators, affecting profitability and putting brands in jeopardy, says GlobalData Financial Services.
In mid-2018 the UK’s Financial Conduct Authority issued a warning to robo-advisors about fee misguidance, but no company faced financial consequences. Across the pond, however, regulators have not been as lenient. In June 2018 the US’s Financial Industry Regulatory Authority fined Betterment for window dressing, and in December 2018 Wealthfront and Hedgeable were charged for making false statements (about the services offered and performance, respectively) by the US Securities and Exchange Commission.
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The robo-advisory space is experiencing heightened competition – indeed, Hedgeable had started to wind down its business even before the fine. This means players cannot afford to have their brands tarnished. Clients have many robo platforms to choose from, in addition to traditional wealth managers and advisors. It is expensive enough to keep up with regulation, and hefty fines that could have been avoided will only make the situation worse.
Any risk to profitability cannot be taken lightly in this climate as robo-advisors are still mostly loss-making start-ups. And there is the possibility that more robo-advisors will face fines. The recent charges were for breaches made years prior, and regulators may identify more examples of non-compliance.
The 2018 Global Wealth Managers Survey shows that increasing transparency of fee structures is a growing concern for wealth managers. Transparency has been one of the selling points of challenger robo platforms, but these fines suggest the space is not entirely committed to this goal. With competition in the robo-advice industry so strong, challengers may be utilizing somewhat disingenuous strategies as they compete for clients and try to separate themselves from the pack.
New and existing digital investment platforms must learn from these fines. For newcomers, ensuring they are fully compliant from day one will be key. Existing players may have pulled the wool over their customers’ eyes in the past, but to avoid any further risk to profitability and brand image they should begin following the rules.
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By GlobalData
