If you’re going to tell your clients that their money will be invested according to a particular strategy, you need to invest it according to that strategy. If you say that “portfolio management services are based on Modern Portfolio Theory” then you should do so.
Should you invest 70% of the client’s assets according to the Modern Portfolio Theory if you say that is the strategy, and then do something else with the other 30%? Probably not. Ally Invest Advisors ran into trouble for doing that. The firm invested 70% according to the Modern Portfolio Theory and allocated the other 30% to cash. That means the firm failed to adequately disclose its investment strategy.
On top of that, an affiliate of Ally Invest was earning some rebates on the interest generated by the cash accounts in the cash allocation. Those rebates were not adequately disclosed according to the SEC order.
The magic of the rebates was that it allowed Ally offer the accounts with no direct fee to its clients. Ally funded operations based on the rebate income.
The order highlights two fundamental pillars for investment adviser compliance: (1) invest the way you tell your clients are going to invest, and (2) adequately disclose all material conflicts.
Sources:
- In the matter of Ally Invest Advisors Inc. (IA Rel. 6954 March 23, 2026)
- Modern portfolio theory