Given that the financial industry regulator has imposed the highest penalty in its history on Robinhood Financial, some advisors fear the slap in the face will hardly contain the company’s alleged misdeeds, while others stress that there will be consequences for advisors from the settlement there when they ponder what they should (and shouldn’t) be doing in their own practices.
On Wednesday, the day before Robinhood filed its S-1 registration statement prior to going public, FINRA announced the settlement and ordered Robinhood to pay $ 70 million for “systemic oversight failure and significant damage” to millions of its customers. The comparison action alleged numerous shortcomings, including the fact that Robinhood provided false or misleading information about client accounts and the risk of loss to which they were exposed in certain option trades, the technology it used to provide “core broker / trader services”, unmonitored and had no adequate business continuity plan to weather the outages of the app at the beginning of March 2020.
The agency also argued that the company failed to conduct due diligence when it relied on algorithms to authorize clients to trade certain options with limited human oversight. These “bots” often used “inconsistent or illogical information” when approving trades, meaning that customers were being allowed into trades that the agency said should not have been eligible.
For Brian Hamburger, President of MarketCounsel, this alleged violation was a reminder that automation in the field can be viewed with excitement but should be moderated with caution.
“Using automation is not a problem, but automation itself cannot be relied on,” he said. “You need to test the automation and really understand the logic of that automation before you just let it run. And when it works, you need to run regular tests to make sure it’s accurate. “
While there were discussions on the advantages of Robinhood’s retail business over the support of financial advisors, Hamburger believed that automation still has a place in investment advice, analysis, and corporate operations. Consultants shouldn’t avoid automation altogether, but he feared that the technology that replaces the functions of human interaction would be entering “dangerous territory”.
“You need to make sure that the logic the bot is using corresponds to the logic that a trained person would use if they had the opportunity. We’re not there yet, ”he said. “We’ll be there at some point in our lives, but we’re not there yet. Until then, automation must be seen as a tool for improvement, not a replacement. “
Although many expected the appearance of regulatory action against Robinhood, Max Schatzow, an attorney with Stark & Stark’s Investment Management and Securities Group, said some aspects of the settlement were surprising. He pointed out that the FINRA letter indicated that Robinhood did not have a procedure for receiving and reporting customer complaints as required by the agency, which meant that around 10,000 complaints were allegedly going unreported.
“I think everyone was expecting a fine,” he said. “This is obviously FINRA’s largest yet, and larger matters like this are usually handled by the SEC.”
Schatzow doubted that FINRA’s fine would be the last regulatory action the retail company faced, noting that the Financial and Operational Combined Uniform Single (FOCUS) report filed with the commission suggests that there are other ongoing investigations there, including the SEC, the Department of Justice, and Congress.
The fine (and the potential for further regulatory developments) comes amid a tumultuous time for Robinhood; this week the company announced it had settled an unlawful death Submitted by the family of a 20 year old day trader who committed suicide after mistakenly believing they had a negative account of more than $ 700,000. The company also filed an S-1 with the SEC earlier this week ahead of an initial public offering (IPO)..
Despite the fact that it was the highest fine in FINRA history, Jeff Levine, the chief planning officer at Buckingham Strategic Wealth, asked if it would prevent future mistakes.
“I don’t necessarily know that this is stopping another company in the exact same position from doing exactly what it did because it has grown dramatically. You will still be very popular, ”he said. “This is ultimately the cost of doing business; If you don’t make the cost of doing business high enough, people will just keep doing it. “
Levine also stressed that smaller consulting firms would not be in the same position if faced with regulatory action for similar behavior because they would not have the benefit of millions of dollars in marketing. He drew a comparison with Wells Fargo, the put together an extensive advertising campaign to polish up its image after a series of scandals.
“They spent a lot of money to polish their image; most of the smaller consulting firms do not have these resources. They get bad press and they get put through the mud, that could be it, ”he said. “That could be devastating and that could mean a retirement situation in some cases if it’s that significant.”
For Hamburger, another insight for consultants was to look at Robinhood’s “breakneck” growth in the light of their own, often rapidly growing, companies to ensure their oversight and compliance programs are solid.
“I think there are a lot of consultants out there who are seeing unprecedented growth,” he said. “It is absolutely critical for them to be in control during this growth.”