WASHINGTON — Wealthfront and Betterment, heated competitors, face a common challenge: accusations that robos can't act as fiduciaries.
"First of all, it's not a debate," says Betterment's general counsel, Benjamin Alden. "Robo advisers are by operation of law fiduciaries" — under both the SEC's definition and the common law definition, he says.
The legal heads of both firms found common ground on the sidelines of a discussion about innovation in wealth management at the SEC's first ever fintech forum.
"It's almost a manufactured issue," said Wealthfront's new general counsel Roy Adams. "We are fiduciaries and we carry that out. We have fewer conflicts than other advisers do, certainly your typical financial adviser who's getting paid from a variety of sources."
Critics of robo advisers argue the digital platforms do not provide personalized investment advice or adhere to the high standard of care under fiduciary investment law. Instead, opponents say they are conflicted.
That's one of the risks of digital advice according to James Allen, head of capital markets policy at the CFA Institute.
"We have to make sure that the algorithms provide clients with personalized advice," Allen said. "If you're going to fulfill your fiduciary obligations, you're going to have to be able to customize advice to the customer's unique circumstances and follow them, so that when circumstances change that you are watching [their investments] on their behalf."
Wealthfront's Adams argued the algorithms employed by robo advisers are used by all major investment firms.
"People keep thinking that there's some kind of magic in the algorithms, but they're not magic," he said. "They're actually standardized, have been used for years and are academically robust. So the concern about algorithms is another red herring."
There are also prescriptions for fiduciaries to define the advice that they provide at both the SEC level and the common law level, Betterment's general counsel added noting that 4% the young firm's workforce is dedicated to legal and compliance.
"How [does fiduciary responsibility] apply to a robo adviser? We would say it applies in the exact same way. In fact, the technology allows you to comply with the duty of loyalty and care at almost a higher standard."
Still, during the panel discussion, Mark Goines, Personal Capital's vice chairman, contradicted Adams, arguing a unique approach for robos due to their algorithms.
"The implementation of regulatory oversight needs to be different," Goines said. "Building algorithms and managing them are very different businesses. Algorithms with minimum inputs run the risk of not understanding clients."
Earlier on Monday, SEC Chairwoman Mary Jo White told the audience that the SEC is examining how robo advisers, as registered investment advisers, meet their fiduciary and other obligations under the Advisers Act.
But she noted that "automated investing advice has the potential to give retail investors broader, and more affordable, access to our markets."
Hours later, she announced she would resign from her role with the end of the Obama administration.
Alden and Adams both interpreted her comments as supportive of the digital advice model.
"We believe and we hope that the law is technology neutral," Alden says.
Allen said that the CFA Institute was focused on advocating for the best investor outcomes rather than the delivery of advice itself.
"We want to make sure it's unconflicted and fiduciary standard advice as it relates to retirement advice," Allen said. "Whether it’s a firm that creates an automated service that does that, or a traditional personal adviser, in our view both should be able to work fine. But we're not going to choose sides."
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