Brokers' Bells and Whistles Can Harm Investors, SEC Panel Finds


Digital cues from online brokers or financial advisors have the potential to harm investors, by coaxing them to make decisions that end up costing them money.

That was a major takeaway from a Securities and Exchange Commission panel on Thursday meant to address the rise of new ways to buy stocks and options. The other major takeaway was that policing those digital cues is a complicated—if not impossible — task.

Members of the SEC Investor Advisory Committee met virtually to discuss the agency’s plans to address the “behavioral design of online platforms.” The SEC is entering into a public comment period before proposing new rules to set up guardrails for online trading and advisory apps.

Robinhood Markets (ticker: HOOD), the brokerage app drawing millions of new investors, was mentioned several times at the meeting. But it’s not the only one that could be affected by new rules. Robo-advisors like Wealthfront and Betterment, and even more traditional financial advisors, will need to take heed as the SEC considers rules.

“Are we going to try and take this very complex area that is multidimensional and try and fit it into a regulatory framework we have today?” asked Heidi Stam, a member of the Investor Advisory Committee and a former Vanguard executive. “Or do we need to really think differently about it, and develop something that has a different approach. And the reason I ask this is that, historically, efforts to regulate or require specific designs — particularly in digital settings — have been impossible or disastrous, or both. Better education of investors is very difficult. We put a lot of information out there, but it’s rarely absorbed, and not often effective.”

The digital bells and whistles that new stock-traders encounter today are not easy to put into a box. Stephen Hall, the legal director and securities specialist of nonprofit Better Markets, told the committee that he thinks that current regulations already are applicable. In particular, he cited Regulation Best Interest (Reg BI), which makes brokers act in the best interest of their customers when they make recommendations.

“At least some of these platforms are either directly or indirectly making recommendations to their users within the meaning of regulation best interest,” Hall said. He mentioned Robinhood during his statement, arguing that the company uses behavioral prompts to increase trading, which increases its revenue.

“These features are designed alone, and in combination to bombard investors with manipulative signals that entice or even pressure them into trading as much as possible, regardless of how it might affect their financial health,” he said. Robinhood allows users to “scratch-off” a free stock on their app, among other design features that critics have pointed to.

In a statement, a Robinhood spokesperson said “we disagree with any characterization of our current products and features as ‘gamified’ or as amounting to a call to action to trade.”

“Applying Regulation Best Interest to self-directed trading platforms like Robinhood would be inconsistent with a fundamental premise of Reg BI, namely that it does not apply to ‘self-directed or otherwise unsolicited transactions by a retail customer,’” the spokesperson added.

Not everyone on the panel was convinced that regulators could draw a line between a recommendation and a simple design enhancement meant to make investing more engaging. Steven Shu, a behavioral finance expert and a principal at a firm called Digital Nudgng Tech, said that digital notifications reminding them of smart investing advice could convince investors to make better decisions. He called them “just-in-time prompts”.

Dan Egan, the director of behavioral finance and investing at robo-advisor Betterment, said that design choices could influence investor behavior in both good and bad ways. 

“We as designers of these apps probably underestimate the relative influence that we have over how people think about and understand and make decisions inside them,” he said. Even deciding whether to show green and red colors for gains or losses, or to highlight one-day moves instead of longer-term stock changes, can impact an investor’s mind-set. Betterment uses prompts to remind investors about the tax consequences of trades, for instance. The company tested prompts about taxes and found it had a substantial impact on behavior — “it reduced the number of allocations changes made by about 90%,” he said. 

He’s concerned that regulators could get too specific about how investment apps should be designed.

“One of the things that I’m wary of is the idea of regulating specific design elements,” he said. “There will always be design, you’d have to pick a font, you’d have to pick a color. I think it’s very important that we encourage both consumer innovation and design and experimentation. We don’t want to get too specific about what people have to do.”

Write to Avi Salzman at

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