The Massachusetts Securities Division says that robo-advisers’ failure to conduct due diligence, as well as their depersonalized structure, may render them unable to provide adequately personalized investment advice and make appropriate investment decisions.
As such, “the Division” has declared that fully automated robo-advisers, as currently structured, may be inherently unable to carry out the fiduciary obligations of a state-registered investment adviser.
Where Robos Fall Short
The term “robo-adviser” has been applied to advisers that are fully automated and to advisers that utilize asset allocation algorithms in combination with human services. The concerns raised in this policy statement apply primarily to fully automated robo-advisers, but each adviser must be evaluated on a case-by-case basis.
Fully automated robo-advisers usually:
- do not meet with or conduct significant (or any) due diligence on a client;
- provide investment advice that is minimally personalized;
- may fail to meet the high standard of care that is imposed on the appropriateness of investment advisers’ investment decision-making; and
- specifically decline the obligation to act in a client’s best interests.
Disclaim “Aims”
Robo-advisers attempt to avoid the issues raised by the structure of their automated investment services by “specifically disclaiming various duties in customer agreements and elsewhere”, disclaimers that the Massachusetts regulators note are “…typically embedded in a lengthy electronic client agreement that must be “signed” by the client before services can be provided.” However, the regulators maintain that “…robo-advisers cannot act as fiduciaries as required under the law in the Commonwealth while, at the same time, disavowing their central fiduciary obligations.”
Nor is Massachusetts the first to raise these concerns; both the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have jointly cautioned investors that an automated tool may rely on assumptions that could be incorrect or do not apply to your individual situation, and may not assess all of the individual’s particular circumstances, including:
- age;
- financial situation and needs;
- investment experience;
- other holdings;
- tax situation;
- willingness to risk losing your investment money for potentially higher investment returns;
- time horizon for investing;
- need for cash; and
- investment goals.
Until regulators have determined the proper regulatory framework for automated investment advice, the Massachusetts Securities Division says that robo-advisers seeking state registration in the Commonwealth will be evaluated on a case-by-case basis.
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