Uh oh robo advisors may not be approved in MA…
As set out below, 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.
And with one notice, Massachusetts puts robo advisors on alert that they may not be automatically approved to do business in the state just because they are registered with the SEC.
Why Robo Advisors May Not Be Approved in MA
Here are some of the reasons laid out by the MSD – Mass Securities Division (“The Division”):
- 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.
Much of the issue comes down to the idea of full due diligence. For example, you can tell your robo advisor on the online form that you don’t have other assets and not disclose your full financial picture. According to the MSD, this is not full due diligence.
A human advisor would know to ask about outside assets and look at the client’s complete net worth and non investment implications to a client’s plan. And then formulate more questions and analysis that would truly serve a client’s best interest.
Robo advisors won’t know to ask more questions and furthermore, according the MSD, some robo advisors put in their language that they are not responsible for outside assets and situations not disclosed. Specifically, in their update, the MSD says:
Rather, the robo-advisers will require the client to agree that he or she is responsible for any assets outside the account. Robo-advisers attempt to disclaim this due diligence duty by stating that they do not provide financial planning or wealth management services.
Robo-advisers often disclaim any ongoing duty to inquire about these questions in the agreements that clients are required to sign, and frequently decline to conduct periodic reviews of client accounts. Changes to a client’s financial or personal situation could broadly affect the appropriateness of investment decisions made by the adviser and the extent to which decisions are personalized.
In addition, since robo-advisers’ information-gathering process commonly consists in 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.
How Can An Advisor Disclaim Responsibility?
Registered Investment Advisors (RIA) by law must follow a fiduciary standard. We must follow a standard of care that goes beyond making recommendations. RIA’s are not brokers. In fact, this is what the entire recent 401k DOL Fiduciary Rule Ruling is all about – increasing the standard of care of anyone who touches ERISA money (401k/403b/457) to the fiduciary standard of care.
Because so many brokers and financial sales people who were not held to the fiduciary standard by their licenses (brokers are not held to the same fiduciary standard as RIA’s) may not have kept clients’ best interest in mind when selling their rollover products.
Therefore, in an environment with increasing government scrutiny, and increasing desire of a more educated public for a fiduciary financial planner, is there any mystery why robo advisors may not be approved if they somehow want to be an RIA who disclaims fiduciary responsibility?
Would you hire an advisor who said things like:
I don’t worry about what other money you have, I just care about the account you gave me
I don’t care if the information you shared is accurate or not, just open an account
Here is my 7 question questionnaire that should tell me everything I need to know about you
If things change, I won’t ask it’s your responsibility alone, not mine
Would you hire someone who said these things to you? If not, that’s the MSD’s position that it’s possible that the language in some robo advisor agreements say things like this.
Chris’ Take on This
I had a friend tell me recently that one of the robo advisors he tested for his mom’s 1.2M account asked only 7 questions. it seems simplistic. But for me, robo’s don’t seem too far from the simple investor profile questionnaires I used when I was new in the business to put people into one of 5 cookie cutter portfolios (for example).
Robos should be understood to be an asset management alternative, in my mind. Not a financial planning or comprehensive planning/wealth management alternative. However, I’m not sure why someone who wanted a mostly passive portfolio wouldn’t just go to Vanguard, Folio (note: I use Folio with clients) or Schwab directly. They’ll put together a nice passive portfolio for you for pennies. And you can use Mint.com to get a complete financial picture.
For those who want to delegate financial matters to a competent planning team, would be better served to find a personal RIA/planning group that handles not only investments, but tax, legal, debt, insurance and business complexities.
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