Though state regulators, academics, and even FINRA have cast doubt on the ability of robo-advisers to serve as fiduciaries, a new white paper has a different take.
In “The Evolution of Advice: Digital Investment Advisers as Fiduciaries,” authors Jennifer Klass and Eric Perelman of Morgan Lewis & Bockius, LLP state that, “Under established principles of fiduciary law, digital advisers are capable of fulfilling fiduciary standards that are consistent with the scope and nature of the advisory services they provide to clients.” They go on to assert that digital advice reflects not a radical departure, but rather “the technological evolution of traditional advisory services and thus fits entirely within the existing regulatory framework governing investment advisers.”
No Single Standard of Care
According to the report, commentators who assert that digital advisers cannot meet the standard of care required of an investment adviser proceed from a fundamental misconception that there is a single standard of care that applies to all investment advisory relationships. However, the paper asserts that under both common law and the Advisers Act, the applicable standard of care may be defined by contract, and the concepts of reasonable care and skill that are at the heart of any standard of care necessarily must be judged in relation to the scope of services agreed to by the client.
The paper tackles head-on the assertion that has been made by regulators that digital advisers differ from traditional advisers because there is no (or limited) human interaction. “The fact that digital advisers do not interface with their clients in the same way as traditional advisers does not mean that they are not fiduciaries to their clients, or that they cannot fulfill the fiduciary standards that govern an investment advisory relationship,” according to the paper.
The authors note that fiduciary duties are imposed on investment advisers “by operation of law because of the nature of the relationship between the two parties.” They explain that advisers, including digital advisers, “have an affirmative duty to act with the utmost good faith, to make full and fair disclosure of all material facts, and to employ reasonable care to avoid misleading clients.”
Personal Touch
A FINRA report had said that on a stand-alone basis, robo-advisers do not meet a fiduciary standard of care when they advise individual investors; rather, human judgment by a trained financial professional is a necessary element of the fiduciary standard. However, rather than accept the personalization distinction that others have made, the authors claim as an accepted legal principle that investment advisers, particularly advisers that are managing client assets on a discretionary basis, are fiduciaries.
“Under both common law and the Advisers Act, the applicable standard of care may be defined by contract, and the concepts of reasonable care and skill that are at the heart of any standard of care necessarily must be judged in relation to the scope of services agreed to by the client,” they write.
Indeed, the paper’s authors appear willing to set aside the personal contact aspect of the advice in favor of access and cost.
“Digital advice can help achieve the important policy objective of addressing the retirement crisis by providing advice that is accessible to individual investors – both financially and technologically.” They go on to note that this includes investors who do not qualify for, or may not be able to afford, traditional advice – investors for whom, the paper explains, the “choice is not between traditional advice and digital advice,” but between digital advice and no advice.
In comparison to no advice at all, “Digital advice that is offered in a responsible manner, consistent with applicable fiduciary standards and the existing regulatory requirements imposed by the Advisers Act, is the far better option,” they write.
