Algorithms & Fiduciaries: Existing and Proposed Regulatory Approaches to Artificially Intelligent Financial Planners

By Lightbourne, John | Duke Law Journal, December 2017 | Go to article overview

Algorithms & Fiduciaries: Existing and Proposed Regulatory Approaches to Artificially Intelligent Financial Planners


Lightbourne, John, Duke Law Journal


ABSTRACT

Artificial intelligence is no longer solely in the realm of science fiction. Today, basic forms of machine learning algorithms are commonly used by a variety of companies. Also, advanced forms of machine learning are increasingly making their way into the consumer sphere and promise to optimize existing markets. For financial advising, machine learning algorithms promise to make advice available 24-7 and significantly reduce costs, thereby opening the market for financial advice to lower-income individuals. However, the use of machine learning algorithms also raises concerns. Among them, whether these machine learning algorithms can meet the existing fiduciary standard imposed on human financial advisers and how responsibility and liability should be partitioned when an autonomous algorithm falls short of the fiduciary standard and harms a client. After summarizing the applicable law regulating investment advisers and the current state of robo-advising, this Note evaluates whether robo-advisers can meet the fiduciary standard and proposes alternate liability schemes for dealing with increasingly sophisticated machine learning algorithms.

We propose that a 2 month, 10 man study of artificial intelligence be carried out during the summer of 1956.... The study is to proceed on the basis of the conjecture that every aspect of learning or any other feature of intelligence can in principle be so precisely described that a machine can be made to simulate it. (1)

INTRODUCTION

Imagine it is a Friday afternoon and, after reviewing her investment portfolio, Alex realizes she would like to make a couple of changes. She calls her financial adviser and gets sent straight to voicemail. She has a small account, and her adviser has multiple clients. It is 3:24 PM ET. The chances of any changes happening today are slim. Alex may like her financial adviser, but he is only human and may not always be available when needed. And as a small account holder, Alex may be a lower priority to her adviser than his high net worth clients or his family. The adviser may have a young family. And balancing the needs of high net worth clients, Alex, and small children may result in Alex falling lower on the totem pole of priority. It is likely that Alex will not hear back from her adviser until Monday--not a catastrophic delay, but an unnecessary one in a world where a tap of her smart watch can pay for dinner.

Enter robo-advisers. These services often use sophisticated machine learning algorithms to provide personalized investment advice and monitoring 24-7. Although the first iterations of robo-advisers did little more than provide suggested portfolio allocations, (2) today's robo-advisers have become increasingly sophisticated. They use algorithms to construct and manage portfolios to "satisfy predefined investment strategies" while a human investment adviser merely oversees those algorithms. (3) Additionally, robo-advisers generally offer lower rates than their human alternatives, possibly encouraging lower-income investors to enter the market and incentivizing current investors to switch platforms. (4) As robo-advisers become more popular, (5) larger wealth managers are beginning to take notice and develop their own robo-advisory services. (6)

Robo-advisers operate in a legal regime that revolves around providing a fiduciary duty to clients. (7) Few legal concepts appear as uniquely "human" as the trusted fiduciary who acts in the best interest of another. The dissimilarity between a trusted family financial planner and a cold, calculating computer algorithm has spurred a lively debate about whether a robo-adviser can meet the highest standard of fiduciary duty, applicable to human investment advisers--continuously acting in the best interest of a client.

This Note explores whether a robo-adviser can meet the fiduciary standard imposed on registered investment advisers and examines who should bear the cost when a robo-adviser falls short of meeting the standard. …

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