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Bates Research  |  06-26-15

New Guidance on Automated Investment Tools

FINRA and the SEC have provided joint guidance on the use of automated investment tools -- the first time that either regulator has definitively recognized the category of automated investing. We've blogged previously about the rise in automated investment services offerings, including the presence of several major players now offering services in that area. The joint agency guidance offers tips on how investors should select, and interact with, automated investment tools including (but not limited to) online calculators, automated asset allocation programs, and online investment management programs.

According to the new guidelines, investors should:

1. Understand any terms and conditions: Disclosures related to fees, expenses, and the withdrawal of funds should be reviewed prior to signing up for the tool or program.

2. Consider the tool’s limitations, including any key assumptions: Automated tools may rely on assumptions that are incorrect or do not match the individual investor's circumstances. Investment analysis tools provided by registered securities firms or individuals must provide a description of the methodology and criteria used by the model.

3. Recognize that the automated tool’s output directly depends on what information it seeks from you and what information you provide: The input you provide will be used by the tool to generate the advice you receive. Check to ensure that all input fields have been completed correctly, and ask questions to the program provider about fields that are unclear to you.

4. Be aware that an automated tool’s output may not be right for your financial needs or goals: An automated tool may not capture all the relevant information regarding a particular investor's risk tolerance, liquidity needs, investment time horizon, investment goals, or taxation (for example). In those cases, the investments suggested may not be right for that investor. Also, any changes in circumstances that impact an investor's needs must be updated in the model to ensure accurate results.

5. Safeguard your personal information: Understand with whom personal information is being shared, and be on the lookout for phishing and other scams when choosing an automated program.