Robo Advisor Ongoing Compliance Obligations

using a robo advisor

#Robo Advisor: What Are Your Ongoing Compliance Obligations?

By Dane Grouell @mezzocompliance

You’ve decided to you use a robo advisor to help manage your practice. No doubt you have experienced the efficiencies and time-leverage that comes with automating some (or even most) of your practice. Hopefully, you did your due diligence on your robo advisor and selected one that meets the needs of your business and clients.

While initial due diligence is important so too is the ongoing work to ensure that in practice your use of a robo advisor is compliant. To that end, we recommend the following best practices.

##ADV Amendments

The single most important thing you can do (besides good prior due diligence) is create accurate and truthful disclosures about your use of a robo advisor.

ADV Part 1 Using a robo advisor is unlikely to merit significant changes to ADV Part 1. You may want to look at Item 5 - Information About Your Advisory Business. Itís possible that your service offerings have changed enough to require amendments to Item 5.E - Fees and Item 5.G - Advisory Activities. It would also be wise to check Item 9 - Custody to make sure you have indicated your clientsí assets are held at a qualified custodian.

ADV Part 2 The narrative nature and extensive disclosures of ADV Part 2 will likely require far more edits.

  • Item 2 - Material Changes - If your chosen robo advisor is a new offering and you are making material changes to ADV Part 2, make sure these changes are noted in Item 2.
  • Item 4 - Advisory Services - Review Item 4 to make sure you fully disclose and describe your portfolio management and other services offered.
  • Item 5 - Fees - Review your fee arrangements with your robo advisor and make sure those fees, as well as your fees, are fully disclosed in Item 5.
  • Item 8 - Investment Methods - Review portfolio management, underlying investment vehicles, rebalancing and any risk management offered by your chosen robo advisor. Note all these, to the extent you are able, in this section.
  • Item 12 - Brokerage Practices - This section will probably need extensive edits. It is imperative that you disclose detailed information about your chosen robo advisor. Disclose the robo advisorís services, technology and how you and your clients utilize each. You also need to disclose any limitations in using a robo advisor.
  • Item 15 - Custody - Make sure it is noted that you use a third-party qualified custodian.

##Create Policies and Procedures

Policies and procedures are essential for any advisory business. Your policies and procedures should cover the following:

  • Workflows - Describe how new account applications and risk tolerance questionnaires are managed. Describe how the relationship with the robo advisor relationship is managed including new account set up, portfolio selection and cash management.

  • Client/Business Management - Describe how your firm will interface with the robo advisor.

  • Due diligence/Annual review - Describe how you will vet a robo advisor (or, really, any vendor) and how you will conduct an annual review.

  • Cyber Security - Describe how client data is stored and backed-up. Is it on your own serves or are you using a third-party host?

  • Business Continuity Planning - Describe how staff can use your robo advisor in the event of a catastrophic business disruption.

##Annual Review

Each year you should perform an annual due diligence review of your chosen robo advisor. A full-scale review is probably not necessary. Rather, double check and reconfirm the information you gathered previously. Look for any regulatory issues.

Review the investment methodology for any changes. Have their underlying investment assumptions changed? Has the portfolio changed? Contact technical support to reconfirm their security measures. This would also be an opportune time to ask if our own system is up-to-date and compatible with their requirements to ensure your software and connectivity are fully secure.


Fully integrating a robo advisor into your practice will yield numerous benefits, primarily by leveraging your time to allow you to focus on clients. However, it is imperative that your firmís compliance program account for your use of a robo advisor. Follow the steps above to make sure your use of a robo advisor remains compliant.

Dane Grouell is the president of Mezzo Compliance, an Oregon-based compliance consulting firm. He provides practical, real-world compliance advice for investment advisers, broker-dealers and funds.

Written on January 21, 2016