The Massachusetts Securities Division (the “Division”) recently issued a policy statement in which it stated, “It is the position of the Division that fully automated robo-advisers, as currently structured, may be inherently unable to carry out the fiduciary obligations of a state-registered investment adviser.” According to the Division, robo-advisers are generally incapable of fulfilling their fiduciary obligations, principally because they do not meet with clients, gather sufficient information on which investment advice can be rendered, nor provide highly personalized advice tailored to the information gathered.
Underlying the Division’s conclusion is it’s assertion that the “primary reason” individuals hire investment advisers is to gain access to “professional personalized investment advice.” While that statement is undoubtedly true with respect to most clients, it seems to disregard the evidence that many investors, particularly younger investors with relatively uncomplicated objectives, are signing up for robo-advisor accounts precisely because the advisers provide generalized investment advice for a very low costs, precisely the benefit of managing accounts via a commuter model. Nevertheless, the Division’s pronouncement of policy praises the personal nature of what it considers the ideal adviser-client relationship, and should tend to encourage those personal advisers who see the rise of robo-advisers as a potential competitive threat.
The Division also concluded that robo-advisers cannot satisfy their fiduciary obligations unless they conduct ongoing due diligence of clients’ assets and provide a personalized structure, suggesting that investment recommendations do not meet the fiduciary standard if they are made only in response to a “brief questionnaire” completed by the client online. The Division doubted that robo-advisers are able to gather sufficient information to discharge their duties.
The Division also pointed to instances in which robo-advisers have attempted to disclaim their responsibility to provide financial planning or wealth management services, particularly with respect to the collection of information relating to the client’s overall assets maintained outside of the robo-adviser’s management. The Division believes that those assets directly impact the robo-adviser’s ability to provide personalized advice. It was not clear whether the Division’s conclusion was based upon a thorough survey of existing advisers or rather anecdotal evidence obtained from reviewing certain robo-advisers’ websites. Nevertheless, the Division did offer examples of certain provisions in the Investment Advisory Agreement of existing and popular robo-advisers that appear to impermissively disclaim the adviser’s fiduciary responsibilities to its client.
The Division also emphasized that the lack of personal interaction raises concerns about a robo-adviser’s ability to spot clients with diminished capacity or clients who are not capable of providing sufficiently accurate information from which an adviser may make a recommendation.
While the Policy Statement asserts that a client “would likely assume that the adviser would make reasonable efforts to become aware of the investor’s financial planning needs,” there is no support given for that conclusion and, indeed, it is extremely common in the investment adviser industry for asset managers to decline to provide overall financial planning services. Nothing in the Massachusetts Securities Act or the Investment Adviser Act of 1940 expressly obligates asset management advisers to provide comprehensive financial planning, but apparently the Division believes the duty to “become aware” of a client’s financial planning needs is within the scope of an adviser’s fiduciary duty.
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