Two 'RIAs' that allegedly falsely advertised using 'artificial intelligence' to aid investment decisions cough up real SEC settlements and censure

Federal regulators are penalizing and censuring Delphia (USA) Inc. and Global Predictions Inc. for falsely claiming to use artificial intelligence (AI) to juice returns for investors. 

The Toronto- and the San Francisco-based RIAs will pay, respectively, $225,000 and $175,000 in civil penalties as part of settlement orders.

As usual, the Securities and Exchange Commission's (SEC) gripe with the punished RIAs was about saying one thing and doing quite another.

"Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,” said SEC Chair Gary Gensler in a release. 

There's a problem with throwing around the latest technology buzz as an investment come-on, he added.

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies.

"Such AI washing hurts investors.” See: How Howard Present parlayed an intern's algorithm into a small fortune -- and when the SEC says he knew of a mega-disconnect

Game changer

Artificial intelligence is one of the latest buzzwords in investing, and its use can be transformative, according to a report by Deloitte, one of the big-four accounting firms. 

AI has proved to be a differentiating factor for generating additional alpha for firms seeking out performance; advancing automation to improve efficiency and managing risk, the report states. 

“Customer experience is a new battleground and AI is helping advisors to generate more insights, customize content more effectively, and deliver it to clients with greater agility and speed,” the report states.

It also calls AI a “game changer” for risk management.  

“However, to fully benefit from AI, firms will need to carefully consider and manage the intersection between technology and talent,” it adds. 

While AI's allure is obvious, firms faking the use of AI are a growing problem, according to the SEC. 

Gensler warned advisors last month about making misleading claims about using AI and cautioned investors about the potential risks of being hoodwinked. 

Come on

Enter Global Predictions; it's a robo-advisor that calls itself “your personal AI financial advisor” on its CEO's LinkedIn page. It goes by the retail name of www.portfoliopilot.com. 

The wording on the website itself has been amended to say: “Your personal financial coach, powered by AI.”

Global Predictions has no ADV1 because it “offers advice to clients and does not manage assets; therefore, there are no assets under management at our Firm,” the ADV2 says.

It charges an annual $99 subscription fee for use of its investing algorithms.

Global Founder and CEO Alexander Harmsen claims in his bio he is “an experienced tech entrepreneur, CEO, board member, and advisor, having founded multiple successful companies and organizations” and has "produced multiple AI-driven products."

False claims

The RIA made false and misleading claims in 2023 on its website and on social media about its purported use of AI, the SEC says. 

"For example, the firm falsely claimed to be the “first regulated AI financial advisor” and misrepresented that its platform provided “[e]xpert AI-driven forecasts.” 

Global Predictions also falsely claimed that it offered tax-loss harvesting services, and included an impermissible liability hedge clause in its advisory contract, the release states.

Global Predictions' website has now made its claims more generic and now says: “Global Predictions' Forecasting and Optimization System is built using hedge-fund-inspired financial models.”

No AI

Delphia, which lists $187 million of AUM on its ADV now also has blander claims. It says it makes its investing decisions based upon an “algorithm," according to its website.

“Our algorithm looks to spot trends in the data — and aims to get smarter the more transactions we see,” it reads in large print. 

It adds in a deck headline of smaller print: “By training an AI on the data we buy, we attempt to spot trends before others catch on.”

From 2019 to 2023, Delphia claimed that it “put[s] collective data to work to make our artificial intelligence smarter, so it can predict which companies and trends are about to make it big and invest in them before everyone else.”

The order finds that these statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed, the release states.

“The firm was also charged with violating the Marketing Rule, which, among other things, prohibits a registered investment adviser from disseminating any advertisement that includes any untrue statement of material fact.”

Risks

Neither Delphia nor Global Predictions admitted or denied the SEC’s findings and consented to the entry of orders finding that they violated the Advisers Act of 1940. 

They were ordered censured and to cease and desist from violating the charged provisions.

Global Predictions writes with great care in its ADV2 about how it uses artificial intelligence.

“Machine learning algorithms (also falling within the category of AI) are used extensively, including but not limited to, generating economic forecasts and sensitivities as well as outputting capital markets assumptions,” it reads.

“Though care is taken by Global Predictions to validate these systems, they carry risks including but not limited to mispecification, inaccurate information, and conflicts of interest that users should be aware of.”

AI uses

Despite the misleading claims, AI can help with stock picking because it has the ability to analyze past stock data and future price fluctuations, according to financial references.  

In addition, AI can detect trends and patterns that an investor might miss. With this critical information, investors can make more informed decisions about which stocks to buy or sell. 

As long as the AI is real, that is.