Fiduciary fail? Key critic says robo advisors are falling short
When it comes to meeting a high standard of care for clients, robo advisors fall short, argues an influential critic of the digital advice platforms.
“It is easy to say that robo advisors are ‘fiduciaries’ in the sense that they are registered investment advisers and owe a duty of loyalty to their clients,” attorney Melanie Fein writes in one of four new papers devoted to the subject, delivered at a symposium at Oxford University on Tuesday.
“But that duty does not ensure the advice given by them will be untainted by conflicts of interest or in each customer’s best interest.”
Two years ago, the D.C.-based securities attorney set off an industrywide debate when she authored an industry-funded whitepaper claiming robos may be unregistered investment companies.
"The Labor Department's endorsement of these algorithmic investment guides seems curious and misplaced," Fein wrote in her original paper.
Spurred by her and other industry-led inquiries, regulators picked up efforts to set guidelines regarding automated advice.
FINRA released guidance for broker-dealers offering digital advice last year, including obligations for ensuring client data is secured and recorded, providing client access to profiles, determining suitability of robo advice and demonstrating how the algorithms determine investments.
The SEC meanwhile endorsed robo advisors as an emerging investment technology, with then-SEC Chairwoman Mary Jo White stating it has the potential to offer retail investors "broader and more affordable access to our markets."
The only state regulator to stake a position on robo advice, the Massachusetts Securities Division, adopted Fein’s skepticism of its ability to be fiduciaries.
The rule has cost the firm tens of millions of dollars in compliance and lost revenue.July 26
In her newest white papers, Fein maintains her skepticism toward the SEC’s stance on purely digital advice platforms.
She argues robo advisors are vulnerable on several points with regard to providing best interest advice.
Many robo advice platforms provide financial advice based on a goals-based methodology. Fein argues that limits the scope of the advice, not accounting for “the investor’s complete financial situation and investment portfolio as a whole.”
The same methodology, based on questionnaire answers, she argues, do not provide personalized advice. “Robo advisors are not designed to consider all aspects of a client’s individual financial situation and needs,” she writes.
Because robo advisors typically do not analyze a client’s entire financial circumstances, she argues, they “cannot develop an overall investment strategy capable of meeting the customer’s risk and return objectives as a whole.”
Robo providers are also fudging their fiduciary claims, she argues. “The word ‘fiduciary’ is virtually absent from robo advisor customer agreements,” she writes.
Finally, Fein argues that robos with “no human contact with the client are limited in their ability to ascertain what the client’s best interest is.”