Robo-advisors can satisfy fiduciary standards set out by the Securities and Exchange Commission’s “flexible” principles under the Investment Adviser Act of 1940, according to a newly released report by the law firm Morgan Lewis.
In their white paper, “The Evolution of Advice: Digital Investment Advisers as Fiduciaries,” Morgan Lewis attorneys argue that critics who have questioned robo-advisors’ ability to meet fiduciary standards “proceed from misconceptions about the application of fiduciary standards, the current regulatory framework for investment advisors, and the actual services provided by digital advisors.”
Fiduciary duties are imposed on investment advisors “by operation of law because of the nature of the relationship between the two parties,” the attorneys, Jennifer Klass and Eric Perelman, wrote.
This advisor/client relationship is enforceable by Section 206 of the Advisers Act, “which applies to all firms meeting the Advisers Act’s definition of investment advisor, whether registered with the Commission, a state securities authority, or not at all.”
Investment advisors, including digital ones, “have an affirmative duty to act with the utmost good faith, to make full and fair disclosure of all material facts, and to employ reasonable care to avoid misleading clients,” the paper states.
Indeed, as the attorneys point out, Sections 206(1) and (2) of the Advisers Act make it unlawful for an investment advisor “to employ any device, scheme, or artifice to defraud any client or prospective client” or to “engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”
Digital advice, the two attorneys argue, has long been governed by the existing regulatory framework, and the products and services offered by digital advisors “are not unique, but instead are technologically enhanced versions of advisory programs and services” available under current regulation.