Do robo advice clients understand they're not receiving comprehensive financial planning?

Yes — and as fiduciaries, robos don't require new rules, argues a new white paper supporting digital advice. But a leading critic of digital advice says the argument "reflects an astonishing lack of respect for fiduciary law."

The paper, "The Evolution of Advice: Digital Investment Advisers as Fiduciaries," is published by Philadelphia-based law firm Morgan Lewis, which represents over two dozen firms either delivering digital advice or developing robo platforms, including Betterment, says Jennifer Klass, a partner at the firm and the paper's author.

Central to the paper's argument is robo advisers can meet the fiduciary duty of care and the duty of loyalty just like humans.

(Bloomberg News)
Some regulators, including the SEC, are still formulating opinions on robo advisers. (Bloomberg News)

"It's a flexible standard," Klass says. "It can and should be interpreted in light of the scope of services that the adviser and the client agree are being provided. That's the main thesis with respect to the fiduciary duty."

Klass emphasizes that digital advisers need to make the scope of available services clear to their clients, as well as assuring clients understand any limitations of the algorithms and the information used to back the advice. "Hopefully going into it, the client has a reasonable expectation of what they're going to receive," Klass says.

Digital advice relies on technology and advice models that already exist in the investment advice space and are within the scope of established regulation, says Klass. "It's not a wholly new product that requires a new regulatory regime or a new scope of rules," she says.


The paper also responds to criticism that the risk tolerance questionnaires used by digital advice platforms aren't enough to build portfolios for clients.

"Under established regulatory principles the information captured in the client-profiling process must be evaluated in relation to the nature of the advice that is provided," the paper argues. "The appropriate question is therefore not how much information an adviser is collecting, but rather whether the information the adviser decides to collect is appropriate in relation to the nature of the advice that is provided."

The paper also states "critics tend to proceed from misconceptions about the application of fiduciary standards, the current regulatory framework for investment advisers and the actual services provided by digital advisers."

Klass hopes the paper builds another perspective on digital advice for the industry, which so far has heard doubts about the services provided. Some regulators and large institutions have also called for more scrutiny of robos.

She says Morgan Lewis is attempting to present a counterbalance with the paper. She says the perception of some of the firm's clients is there has been more negative commentary about robos when faced with regulatory questions than positive.

"I don’t think we're trying to pick a fight, and it shouldn't be interpreted that way," Klass adds. "We're trying to make the persuasive and passionate argument for the other side."


The paper notes the work of D.C. securities attorney Melanie Fein, whose October 2015 paper "Robo-Advisors: A Closer Look," introduced much of the scrutiny about digital advice.

The report, commissioned by asset management giant Federated Investors, has been quoted by regulators, including the Massachusetts’ securities regulator and FINRA.

Fein blasted the Morgan Lewis white paper for "its gratuitous attempts to discredit those who question whether robo advisers fulfill the fiduciary duties of loyalty and care."

She took issue with the paper's argument that digital advice clients "have affirmatively chosen not to enroll in a comprehensive financial planning or investment management service," and would need to pay extra to access planning that includes outside resources, debt, financial history, career and anticipated medical expenses.

"While it is true that the customer contract can define the scope of an adviser’s fiduciary duty, an investment adviser who purports to give fiduciary advice on retirement savings without taking those factors into consideration would risk breach of fiduciary duty," Fein says.

She also acknowledges the SEC has never provided detailed guidance on the scope of advice necessary to satisfy an adviser’s fiduciary duty of care under the Investment Advisers Act of 1940.

"[But] I am not aware that the SEC ever has endorsed such a cavalier approach to investment advice as propounded by the authors of this paper," she says.


Noting that the wealth management industry is moving to accept digital advice, Fein says that regulators should double their scrutiny as a result.

"The authors claim that robo advisers aim to serve first-time investors who cannot meet the normal minimum balance requirement. Yet, these investors are precisely the people who need the protection of fiduciary law."

In support of the new paper, Betterment's legal counsel Seth Rosenbloom agrees that "there's no requirement that advisory services be delivered in a one-size-fits-all model, and that individual advisers and digital advisers and clients can jointly decide on what the right scope of services is for them."

Rosenbloom applauds the paper for challenging the use of the term fiduciary. "Let's be a little more rigorous about what we mean when we say fiduciary," he says. "Sometimes people just use it as a label when they don't agree with something."

Rosenbloom notes the white paper, which was produced with input from Betterment, was developed long before the firm received a letter from the Massachusetts’ securities regulator telling it to change its client communications policy by the end of September.

He had no comment on the letter, but stated the firm had no fiduciary concerns regarding its decision to temporarily suspend trading the morning after the Brexit vote in June.

Any new technology will raise the question about whether it fits within existing regulations or requires new regulation, Rosenbloom adds. However, Betterment sees the dialogue on digital advice as too one-sided in a way that does not acknowledge how digital advice fits within the existing regulatory framework.

"A lot of the counter arguments out there have this idealized version of a traditional advisory relationship. And the reality is, in the existing landscape it's pretty varied," he says. "Hopefully this leads to a more robust conversation about what the law actually requires and what the realities currently are."