U.S. federal regulators charged a New York-based investment advisory firm and two co-owners with misleading clients into investing in a risky hedge fund.

The Securities and Exchange Commission charged that Timothy Dembski and Walter Grenda of Reliance Financial Advisors misled clients who were retired or nearing retirement and living on fixed incomes to invest in a fund managed by Scott Stephan.

Stephan, who managed Prestige Wealth Management Fund, had "virtually no investing experience," the SEC said. He has agreed to settle similar charges leveled against him.

Dembski's and Grenda's clients invested about $12 million in Prestige Wealth. Some of the clients had to cash in variable annuities, incurring a total of $290,000 in surrender fees, in order to come up with the money to invest in the fund, the SEC says.

The advisors are accused of telling clients that the fund used a sought-after trading algorithm to invest. According to the SEC, Stephan designed the algorithm as a day-trading strategy that would hold no securities overnight and would automatically buy and sell stocks and exchange-traded funds (ETFs) at pre-programmed times of day depending on market signals. The SEC says Dembski and Stephan did no real-time testing of the algorithm and neither had experience running such strategies.

The algorithm did not work and the fund collapsed within two years since starting trading in April 2011, wiping out the vast majority of its investments.

Financial Advisor magazine staff contributed to this article.