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UC Law Business Journal

Abstract

Automated investment advice platforms, also known as “roboadvisors”, are investment advice tools that have quickly grown in popularity over the last decade. These sophisticated software platforms allow individuals to receive low-cost financial advice about various financial planning goals, such as creating or adjusting investment portfolios, retirement planning, education funding, and the like, simply by entering asset and demographic information into an online platform. The robo-advisors automatically generate the financial advice based on the data inputs with little to no involvement from a human financial advisor. The allure of these low-cost, easily accessible robo-advisors has captured a large segment of the consumer market. As robo-advisors grow, the regulatory outlook for investment advisors is changing. The scope of fiduciary duty is encompassing more and more areas of financial advice. In addition, a newcomer onto the liability field, known as the “best interest” standard, has elevated the liability standard for broker-dealers to a fiduciary-like status. This has created a contrast between automated, generic advice and the regulatory push towards personalized, fiduciary advice. In this paper, we determine whether robo-advisors are able to meet the liability standards set forth by regulators and recommend the ways in which robo-advisors can best serve consumers.

We first discuss the fiduciary and best interest standards for investment advisors in depth by reviewing statutory language, whitepapers and guidance issued by various regulating bodies, and thought leadership put forth by industry experts. Next, we evaluate whether robo-advisors are able to meet these standards by reviewing guidance from regulatory agencies and commentary from thought leaders, peer-reviewed articles, and regulators. We find that robo-advisors can meet the fiduciary standard when providing limited-scope investment advice, and can meet the best-interest standard in most cases. However, robo-advisors may not rise to a fiduciary level when providing broad, comprehensive financial advice, such as preparation of an estate plan, retirement plan, or overall wealth management. In our conclusion, we propose a clarification of regulatory language to 1) recommend the specific services for which robo-advisors are best or bettersuited compared to human investment advisors, and 2) prohibit roboadvisors from performing services for which they are ill-suited.

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