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Massachusetts Says Full Robos Can’t Be Fiduciaries

The Bay State's Securities Division says that robo-advisers’ failure to conduct due diligence, as well as their depersonalized structure, may render them unable to provide adequately personalized investment advice and make appropriate investment decisions.

As such, “the Division” has declared that fully automated robo-advisers, as currently structured, may be inherently unable to carry out the fiduciary obligations of a state-registered investment adviser.

Where Robos Fall Short

The term “robo-adviser” has been applied to advisers that are fully automated and to advisers that utilize asset allocation algorithms in combination with human services. The concerns raised in this policy statement apply primarily to fully automated robo-advisers, but each adviser must be evaluated on a case-by-case basis.

Fully automated robo-advisers usually:


  • do not meet with or conduct significant (or any) due diligence on a client;
    provide investment advice that is minimally personalized;

  • may fail to meet the high standard of care that is imposed on the appropriateness of investment advisers’ investment decision-making; and

  • specifically decline the obligation to act in a client’s best interests.


The regulatory agency notes that, since robo-advisers’ information-gathering process commonly consists of a brief online questionnaire, there may be regulatory concerns that the adviser is unable to determine independently the identity of the user (at the outset or at any time after), whether that user is a senior citizen, a person with diminished capacity, a child, or otherwise; nor do robo-advisers otherwise take any steps to verify that the information provided by clients is accurate – instead relying on the information initially provided by the client as true and valid. This practice also raises serious concerns about a robo-adviser’s ability to spot clients with diminished capacity or clients who may not understand their financial picture sufficiently to provide accurate answers to the questions asked.

Disclaim ‘Aims’

Robo-advisers attempt to avoid the issues raised by the structure of their automated investment services by “specifically disclaiming various duties in customer agreements and elsewhere,” disclaimers that the Massachusetts regulators note are “typically embedded in a lengthy electronic client agreement that must be ‘signed’ by the client before services can be provided.” However, the regulators maintain that “robo-advisers cannot act as fiduciaries as required under the law in the Commonwealth while, at the same time, disavowing their central fiduciary obligations.”

Massachusetts is not the first to raise these concerns; both the SEC and the Financial Industry Regulatory Authority (FINRA) have jointly cautioned investors that an automated tool may rely on assumptions that could be incorrect or do not apply to your individual situation, and may not assess all of the individual’s particular circumstances, including age, financial situation and needs, investment experience, other holdings, tax situation, willingness to risk losing your investment money for potentially higher investment returns, time horizon for investing, need for cash, and investment goals. Consequently, they explain that some tools may suggest investments (including asset-allocation models) that may not be right for you.

Until regulators have determined the proper regulatory framework for automated investment advice, the Massachusetts Securities Division says that robo-advisers seeking state registration in the Commonwealth will be evaluated on a case-by-case basis.

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