Robo advisors' breakneck growth is being followed by a nagging question: Can they be fiduciaries?

In the latest salvo in the long-running debate, Melanie L. Fein, the former senior counsel to the board of governors of the Federal Reserve, says FINRA's March guidance on robos for B-Ds actually bolsters her argument that robos do not provide fiduciary advice.

"The implication of the FINRA report is that they cannot," Fein writes in a new white paper.

Fein, author of a previous study saying that robos cannot be fiduciaries, says that the FINRA report suggests advice is best left in the hands of human advisors. "If a robo advisor cannot perform overall portfolio analysis, it cannot perform a critical function of an investment fiduciary."

FINRA previously said that firms employing digital advice would need to "govern and supervise the algorithms they use in digital advice tools" and "should also establish governance and supervision structures and processes for the portfolios digital investment tools may present to users."

Read more: FINRA Vows Keen Oversight of Digital Advice Tools

This distinction, Fein says, is important in considering whether the advice generated by robos meets the same fiduciary standard of care that is now applicable to a human advisor.

"The report suggests that, on a stand-alone basis, robo-advisors do not meet a fiduciary standard of care when they advise individual investors," she writes.

PORTFOLIO ANALYSIS TEST?

Fein also writes that an industry-wide standard must be set to determine whether an RIA, which has the status of a fiduciary under the Investment Advisors Act of 1940, is still in compliance when the firm does not provide portfolio analysis.

"The best interest of the client requires the advisor to conduct some degree of portfolio analysis when providing investment recommendations," Fein says. "Without portfolio analysis, the advisor cannot be confident that the investment advice is appropriate for an individual client."


In her first report, Robo-Advisors: A Closer Look, Fein argued that robo advisors may be unregistered investment companies, in violation of both the Investment Company Act of 1940 and SEC regulation. That report was commissioned by asset management giant Federated Investors.

She called on the SEC to take action. "If the duty of an investment advisor does not encompass a duty to provide overall portfolio analysis, the SEC needs to say so."

On Tuesday, Jane Jarcho, deputy director of the SEC’s Office of Compliance Inspections and Examinations, noted the regulator sees some areas of risk regarding robos, but didn't have any extra concerns about it as a source of advice, an SEC spokesperson said.

The SEC declined to comment as to whether it is undergoing any examinations of robo advisors.  

Separately, SEC Commissioner Kara Stein has publicly questioned whether a fiduciary duty applies to automated advice -- and whether existing laws should be revised to account for digital wealth management platforms.

Fein complimented the Massachusetts Securities Division for its new policy to examine robo advisors on a case-by-case basis seeking registration in the state. She viewed the policy – which incorporated a number of points from her original paper – as one possible solution to developing a regulatory playbook on digital advice.

Fein recommended that the uneducated investor stay away from robo advice; only investment professionals would be properly skilled enough to use the digital platforms.

"The FINRA report highlights a number of reasons why robo advisors may have limited utility as a source of fiduciary investment advice for individual investors," she writes.

Robo firms have previously rejected Fein's critiques. 

"At Betterment, we hold our fiduciary responsibility with the highest regard," said Betterment spokesman Joe Ziemer previously. "We've gone to great lengths to build our platform from the ground up, ensuring that we are fully aligned with our customers and clear in the value we offer."