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October 13, 2015 at 10:00 AM
Should robo-advisors have to follow a First Law?
A new paper says they might not be all they’re cracked up to be.
In science fiction author Isaac Asimov’s futuristic tales of robots, all robots must follow the Three Laws—the first of which is, “A robot may not injure a human being or, through inaction, allow a human being to come to harm.”
And while the Department of Labor says that robo-advisors are good for people saving for retirement, since they minimize costs and aren’t subject to conflicts of interest, the SEC and FINRA have basically said, “Not so fast.”
Robos, say the latter two agencies, can present a different set of risks for investors: they may work on incorrect assumptions or make their recommendations based on data that are incomplete or irrelevant to an individual’s personal finances.
Therefore, robos’ recommendations may not be appropriate for the individual for whom they are made.
In “Robo-Advisors: A Closer Look,” a paper prepared for Federated Investors, Inc., by Melanie L. Fein, an attorney who advises on banking, securities, and trust law and has served as an adjunct at Yale Law School, robos don’t come off looking so well.
The paper looked at the user agreements for three main robo-advisors to see whether they “provide personal investment advice, minimize costs, and are free from conflicts of interest” and to “evaluate whether robo-advisors meet a high fiduciary standard of care and act in the client’s best interest.”
