A New York robo-adviser that claimed to offer investments that complied with Shari-ah (Islamic) law ran afoul of securities law recently. The SEC charged the company, Wahed Invest, LLC, with breach of fiduciary duty, misleading investors and compliance failures.
Wahed Invest agreed to settle the charges without admitting or denying the SEC’s findings. The settlement involves a cease-and-desist order, a mandated compliance consultant and a $300,000 penalty, among other remedies.
What is a robo-adviser?
In general, a robo-adviser is just an automated digital investment adviser. The program collects information about the client’s goals, risk tolerance, investment horizon, income, assets and the like via an online survey. It then provides an investment portfolio and manages it. However, the investment approach, services provided and other features can vary widely. Robo-adviser clients are often seeking lower account minimums and/or lower costs and fees.
Although financial professionals have used automated investment tools for decades, it is a relatively new phenomenon for them to be available directly to investors. According to the SEC, it is crucial to be aware of robo-advisers’ limitations, including that the advice they offer may not always be appropriate for your individual situation.
Robo-advisers are still advisers. They are still required to disclose conflicts of interest to clients, market in a way that is not misleading, and implement “written policies and procedures reasonably designed to prevent the advisor from deviating from its claimed investment process.”
What did Wahed Invest allegedly do wrong?
According to an SEC news release, between September 2018 and July 2019, Wahed Invest advertised that it maintained its own proprietary funds when, in fact, no such funds existed. It also failed to rebalance accounts as promised.
In July 2019, Wahed Invest did launch a proprietary exchange-traded fund (ETF). However, it used client funds to seed that ETF without notifying those clients of any conflicts of interest.
In general, Wahed Invest claimed to provide services that complied with Shari’ah law. However, the SEC found no evidence of written policies or procedures that would ensure the company did comply with Shari’ah law.
SEC enforcement like this is crucial to protecting investors, especially when non-monetary interests like Shari’ah compliance are at issue. Another way investors can protect themselves is by bringing lawsuits against advisers who mislead them or break the law in ways that cost them money.