Harmed by Automated Investment Tools?

Earlier this year, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) released an investor alert related to automated investor tools. While these types of tools provide benefits to investors, they also come with certain risks and limitations.

What are the Risks and Benefits?

Automated investment tools have been utilized by financial professionals for several decades. They include, but are not limited to, personal financial planning tools, portfolio selection or asset optimization services, and online investment management programs. Professionals in the financial industry use them to help build and manage the portfolios of customers.

However, these tools are becoming more widely available to investors directly. They allow investors to create rules for trade purchases and sales. After the investor enters all of this information, the program can automatically execute the investor’s plan.

Some of the benefits of automated investment tools include:

Low cost: automated tools and services can help reduce fees that an investor must pay.
Easy to use: using these tools can be as simple as entering answers to a few questions into an online program.
Helps to mitigate effect of emotion: after the investor inputs the rules, the programs makes the buy or sell decision; this can help keep an investor from not making a trade because of his or her feelings or emotions.

While there are many benefits to automated investment tools, investors should be aware of their limitations as well. These tools use programs that, while sophisticated, cannot account for all options or possibilities. Further, they may rely on assumptions that are not correct or that do not apply to a particular investor’s situation.

Automated investment tools require that the investor input answers to several questions. In some cases, these questions may be intentionally designed to lead to a particular outcome or investment. This also requires that the investor fully understand the questions. If the tool or service does not provide an option to speak with an actual person, an investor may be faced with either answering a question he or she has some level of confusion about or not use the tool.

Alternatively, the questions may not cover an issue that is of critical importance to the investor. This is where the lack of personal connection can be harmful to the investor. A real person with experience in the financial market can better profile an investor than a computer program can. Some issues that automated investment tools may not account for include the investor’s:

Family situation;
Age;
Financial position;
Other holdings;
Comfort with risk tolerance; and
Overall investment goals.

Finally, a limitation of automated investment tools is that they still require some level of monitoring. If there are connectivity issues, power losses, or computer crashes, the trade may not be executed. Additionally, these tools may develop anomalies that result in unwanted orders, orders that are not placed, or duplicate orders. As a result, some level of investor oversight is necessary to ensure the tool is operating as desired.

Securities Law Attorneys

Investor alerts are just one of the ways in which FINRA attempts to protect investors. If you believe you have suffered financial loss due to stockbroker misconduct, FINRA also provides a means of recovery through securities arbitration or mediation. For more information, speak with an experienced securities law attorney today.