There’s regulation in place that holds robo-advisors to the fiduciary standard, but a recent academic paper suggests that regulators may need to do more to protect investors, InvestmentNews writes.
A Need for Customization for Each Client
That’s because a robo-advisor will only do what it’s programmed to do, Tom Baker, a University of Pennsylvania Law School professor, and Benedict G.C. Dellaert, a marketing professor at the Erasmus University Rotterdam, wrote in a paper by the Institute for Law and Economics at the University of Pennsylvania Law School cited by InvestmentNews.
The researchers argue that regulators should devise further procedures for making sure that robo-advisors put the clients’ best interest first as they are obligated by the Securities and Exchange Commission and the Investment Advisers Act, according to the publication.
And now is the time to act, the paper’s authors say, before the $100 billion in client assets currently held by robos turns into the $385 billion Cerulli Associates estimates they will reach by the end of 2021, InvestmentNews writes. Potential issues are easier to resolve before the systemic risks arising from robo-advice affect millions of investors, according to the paper.
The researchers say it would be naive to assume, for example, that intermediaries who offer both a robo-advisor and other financial products would automatically opt for algorithms and architecture in the clients’ best interests, InvestmentNews writes.
Steve Dunlap, president of technology and asset management firm FolioDynamix, tells the publication that regulators should pay attention to how robos customize advice for each client and how their recommendations adjust to the client’s changing needs. After all, he says, many robos just run through a standardized questionnaire and assign investors into a portfolio, which isn’t the same as sitting down with a human advisor who covers all the client’s information before making recommendations, according to InvestmentNews.
The SEC has issued guidance to robo-advisors warning them to be clear about their algorithms and assess the quality of their questionnaires, the publication writes. The regulator has also put robo-advisors on its list of examination priorities this year, according to InvestmentNews.
Commentary on InvestmentNews article by Liz Skinner
Posted by: The Wealth Advisor
