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July 14, 2016 at 09:38 AM
On the same day that robo-advisor Betterment announced it had hit the $5 billion asset mark, Massachusetts regulators issued guidelines for financial advisors using such services to manage client assets.
Advisors must adhere to the disclosure policies in order to “best comply with the Massachusetts Uniform Securities Act and meet the fiduciary duties owed to their clients,” according to Commonwealth Secretary William F. Galvin, the state’s top securities regulator.
The state’s 700 registered investment advisors also are asked to inform investors of any and all fees connected with the use of third-party robo-advisors. Galvin’s office says it will review all fees charged to determine whether an advisor’s fees “are excessive.”
“My office has recently raised serious concerns as to whether and/or how a robo-advisor can act as a fiduciary, given the structure in which they work. If the state-registered investment advisor fills that gap and provides services not provided by the robo-advisor that is a positive step,” Galvin said in a statement.
“It is vital, however, that investors are fully aware of the role robo-advisors play in the handling of their accounts and the limitations, restrictions and fees which result,” he explained.
As outlined in the state guidance, advisors must:
- Clearly identify the sub-advisor as a robo advisor and explain the services provided by the third-party robo-advisors;
- Inform clients that they could receive asset allocation services directly from the third-party robo-advisor;
- Detail the ways in which state registered advisors provide value to the client for its fees;
- Specifically identify the services that the advisor cannot provide to the client;
- Make clear to the client that the third-party robo-advisor may be limited in the types of investment products available to the client: and
- Use unique, distinguishable language to describe the services of the investment advisor and the third-party robo-advisor.
According to Cerulli Associates’ analysis in 2015, robo-advisors – which rely on asset allocation models and algorithms to invest client portfolios, typically in exchange-traded funds – could see their assets under management jump 2,500% by 2020 to nearly $490 billion.
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