Can Robo-Advisors Really Be Fiduciaries?

How should robo-advisors be regulated? That’s a question the Securities and Exchange Commission must tackle, as assets managed by these firms will surge to $2 trillion in the next five years, argues SEC Commissioner Kara Stein.

The robo-advisor concept “did not even exist when most of the laws applicable to investment advisors were drafted,” Stein noted during a recent speech. “Most of these laws are based on the idea of a human investment advisor on the other end of the phone or sitting across the table from you.”

The “linchpin” of investment advisor regulation, Stein continued, “is the fiduciary duty,” which means that the advisor “must avoid conflicts of interest and cannot take unfair advantage of a client’s trust.”

But what does a fiduciary duty “even look like or mean for a robo-advisor?” Stein wondered. “The idea of a robotic entity that automatically generates investment advice certainly bumps up against what we would traditionally think of as a fiduciary.”

Can robo-advisors “be neatly placed within our existing laws,” she asked, “or do we need certain tweaks and revisions?”

Investors may not realize that robo-advisors “will not be on the phone providing counsel if there is a market crash,” Stein said.

Stein was citing in her speech recent figures released by Cerulli Associates that robo-assets would jump 2,500% over the next five years, to $489 billion. Betterment, for instance, announced in early November that its assets tripled during the first 10 months of this year to $3 billion.