The Financial Industry Regulatory Authority (FINRA) has identified an increase in unregistered entities claiming to provide automated or “auto-trading” services to retail investors through websites or mobile phone apps. Many of these unregistered entities misleadingly claim that their auto-trading services are beginner-friendly and/or risk-free, provide consistent monthly returns of more than 10 percent, and/or benefit from using advanced technologies like artificial intelligence (AI) to make trading decisions.

These unregistered entities are increasingly promoting their auto-trading services to retail investors on social media, through advertisements or via email, texts or online materials and usually charge monthly or quarterly fees. While all investing comes with risk, investments made through unregistered auto-trading services present certain unique considerations.

Understanding Auto-Trading Services

Auto-trading generally refers to the practice of a third party sending trading instructions directly to an investor’s brokerage account for immediate execution. Registered investment advisers (RIAs), who are registered with and overseen by the Securities Exchange Commission (SEC) or state securities regulators, might offer auto-trading apps and/or websites as a service to their clients. Services available from registered entities must follow federal and state rules that provide investor protections.

However, other auto-trading services are being offered by entities that aren’t registered with either the SEC or the state in which they’re providing those services. Services provided by unregistered entities lack the regulatory oversight and investor protections required of registered firms and individuals. For example, when offered by registered entities, auto-trading services must comply with rules that require prioritizing the client’s best interest and avoiding conflicts of interest. Auto-trading services offered by unregistered parties, on the other hand, might not meet these standards.

In addition, finding objective information about the background and experience of unregistered entities and unlicensed individuals who might be operating auto-trading services can be difficult. This means it might be hard for you to assess the qualifications of those behind trading decisions made for your account.

Identifying Red Flags in Auto-Trading Advertisements

Ads for unregistered auto-trading services can be enticing, often referencing consistent returns and advantages such as increased convenience and capabilities like the use of AI to inform trades. To create the appearance of legitimacy, unregulated entities might falsely claim to have partnerships with reputable broker-dealers, sometimes using broker-dealer logos without permission. Unregistered entities might also make exaggerated and, in some cases, fraudulent claims about the results their auto-trading services can provide. The ads might also mention “assets under management,” a term associated with RIAs, even though the individual or entity operating the app might not be registered with the SEC or a state.

Risks of Unregistered Entities Providing Auto-Trading Services

Some of the potential risks to be aware of when using auto-trading services provided by unregistered entities include the following:

* Risky or Inappropriate Investments – Trading decisions implemented in your brokerage account by an unregistered third-party might be inconsistent with your risk tolerance and investment goals. And, due to the nature of auto-trading, you might incur significant losses before you even realize that transactions occurred on your behalf.

* Unsupported Claims of Profitability – Some auto-trading services promote vague and unverified claims of impressive past market returns. They might reference substantial profits on individual trades without providing any meaningful evidence to support such claims. The cited gains could be misleading, highlighting only profitable investments while ignoring investments that don’t perform well, for example. Also consider that the investment pitch might be an outright fraud or lie.

* AI Washing – Apps might falsely claim to use AI in their auto-trading services or overstate their AI capabilities to create the perception that the platform is using cutting-edge technology that will benefit investors. This practice is known as AI washing. Such claims might include statements that their AI can automate risk controls, optimize profitability and predict market moves. False claims of AI capabilities might also be used to support fraudulent schemes in which investors’ money is stolen rather than invested.

* Data Risks – Be mindful of whom you share your information with, especially if the unregistered entity is asking for your credentials, such as the username and password to your brokerage account. Providing this access to your funds and personal identifiable information (PII) poses serious privacy and financial safety concerns.

How to Protect Yourself

There are steps you can take to protect yourself against the risks of auto-trading services provided by unregistered entities, including the following:

* Research providers of auto-trading services. Make sure the financial services you receive are provided by registered financial professionals and firms. Use FINRA’s BrokerCheck tool to check out the background of any individual or firm you’re considering entrusting with your investments. If an auto-trading app or website claims to work with an investment professional or firm, verify the partnership by contacting the firm directly using information found through BrokerCheck.

* Be suspicious of claims of extraordinary past performance. Disregard claims lacking specifics or audited proof, as well as testimonials if there’s no way to confirm or evaluate the truth of the statements. Registered firms are required to provide certain disclosures related to investment performance in their advertising and might cite independent parties that have verified their claims. Unregistered entities aren’t held to these same standards. Guarantees of investment performance are a red flag; all investments carry some degree of risk.

* Be skeptical of vague or overstated claims about use of AI or other cutting-edge technologies. Any auto-trading investment service should be able to explain with specificity how its technology works. Be mindful of services that list technological capabilities as buzzwords without any additional context. Registered firms have disclosure obligations that could include details regarding their use of technology.

* In addition, even when using auto-trading services offered by regulated entities, you should always monitor the activity in your accounts to be sure your trading is aligned with your investment goals and risk tolerance. Consider talking with an investment professional about whether auto-trading is right for you.

Learn more about protecting your money at FINRA.

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John H. Kaighn