Robo-advisors may face close scrutiny from US regulators
Speaking at a lecture at Harvard Law School SEC Commissioner Kara Stein told the audience that the commission is publicly questioning whether fiduciary duty applies to robo-advice and whether existing laws should be amended to account for the emergence of digital wealth management platforms. As we reported last month, a report commissioned by Federated Investors, suggested that robo-advisors may be unregistered investment companies in violation of  both the Investment Company Act of 1940 and SEC regulation.

33 Pages Posted: 10 Sep 2015 Last revised: 14 Nov 2015

Date Written: June 30, 2015

Abstract

Robo-advisors have been touted by the Department of Labor as a source of investment advice that can benefit retirement investors by minimizing costs and avoiding conflicts of interest. On the other hand, they have been labelled as gimmicky and overly simplistic by some critics who have used them. The Securities and Exchange Commission has cautioned that robo-advisors may result in investment recommendations that are based on incorrect assumptions, incomplete information, or circumstances not relevant to an individual investor.

This paper examines whether robo-advisors in fact provide personal investment advice, minimize costs, and are free from conflicts of interest. It also evaluates whether robo-advisors meet a high fiduciary standard of care and act in the client’s best interest. Based on a detailed review of user agreements for three leading robo-advisors, this paper concludes that robo-advisors do not live up to the DOL’s acclaim. They are not designed for retirement accounts subject to ERISA and should be approached with caution by retail and retirement investors looking for personal investment advice.