Texting, tweeting and emailing are second nature to people these days, but financial advisers who use social media in the wrong way are getting into trouble. If you’ve gotten a personal text or seen some tweets touting great investment returns, take a closer look. They could be some pretty serious red flags.
The Securities and Exchange Commission (SEC) recently fined two robo-advisers, Wealthfront Advisers and Hedgeable, for social media pitfalls. The proceedings are the SEC’s first enforcement actions against robo-advisers, which provide automated, software-based portfolio management services. Both companies were charged with violating rules on recordkeeping, antifraud, advertising and compliance.
In December the SEC fined Wealthfront – one of the nation’s largest robo-advisers, with $11 billion in assets under management — $250,000 for improperly retweeting prohibited client testimonials, paying bloggers for client referrals without the required disclosure and documentation, and failing to maintain a reasonable compliance program.
Tweet Problems at Wealthfront
Wealthfront used Twitter to post advertisements and communicate online with clients but didn’t always preserve copies of the ads or retain communications made through its Twitter account relating to recommendations or advice given to clients. It retweeted positive posts by other Twitter users whom it knew or should have known had an economic interest in promoting Wealthfront, without disclosing these conflicts of interest. For example, some of the retweeted posts originally were made by Wealthfront employees, Wealthfront investors, and Wealthfront clients who received free services if a reader used the client’s personalized landing page to enroll with Wealthfront. The firm’s policies and procedures did not ensure that all retweets were assessed by the Compliance Department before being posted, as required by SEC rules.
The SEC also found that Wealthfront made false statements about a tax-loss harvesting strategy that it offered to clients. It told clients that it would monitor all accounts for transactions that might trigger a wash sale, but failed to do so. The robo-adviser agreed to pay the fine without admitting or denying the SEC’s charges.
What Happened at Hedgeable
A separate SEC order fined a New York City-based robo-adviser, Hedgeable, $80,000 for misleading statements about its investment performance. According to the order, from 2016 until April 2017, Hedgeable posted on its website and social media purported comparisons of the investment performance of Hedgeable’s clients with those of two robo-adviser competitors. The performance comparisons were misleading because Hedgeable included less than 4% of its client accounts, which had higher-than-average returns. Hedgeable compared these figures with rates of return that were not based on competitors’ actual trading models.
The SEC alleged Hedgeable failed to maintain documentation or a reasonable compliance program. Like Wealthfront, Hedgeable agreed to pay the fine, without admitting or denying the SEC’s findings.
“Technology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “Regardless of their format, however, all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.”