Despite efforts by regulators to set guidelines on the digital advice space, robo-advisors still fall far short of meeting the fiduciary standard, Financial Planning writes.
Limited Ability to Determine the Client's Best Interest
There’s no guarantee that merely saying that robo-advisors are “fiduciaries” will ensure that they’re serving in the client’s best interest unencumbered by conflicts of interest, attorney Melanie Fein writes in a new white paper, according to the publication.
Two years ago, Fein first suggested in an industry-funded paper that robo-advisors could in effect be unregistered investment companies, Financial Planning writes. At the time, she said the Department of Labor’s embrace of the digital advice platforms seemed “curious and misplaced,” according to the publication. Finra has since come out with guidance on digital advice platforms, including requirements to explain how the platforms’ algorithms come up with investment recommendations and their suitability, Financial Planning writes.
The SEC, meanwhile, has endorsed robo-advice for its potential to give wider and cheaper access to retail investors who want to invest, according to the publication. The Massachusetts Securities Division, on the other hand, has been skeptical on robos’ ability to act in the clients’ best interests, Financial Planning writes.
Fein’s most recent white papers suggest that the goals-based approach adopted by robo-advisors fails to account for a client’s entire financial situation, according to the publication. Robos, therefore, can’t come up with strategies that would meet a client’s overall risk-and-return objective, she argues, according to Financial Planning. The lack of human access, Fein writes, also means that robos are constrained in how they can determine a customer’s best interest, according to the publication. What’s more, even the term “fiduciary” is often missing from client contracts on such platforms, she writes, according to Financial Planning.
