Risk, Reward, Robo-Advisers: Are Automated Investment Platforms Acting in Your Best Interest?

By Litz, Dominic | The Journal of High Technology Law, January 2018 | Go to article overview

Risk, Reward, Robo-Advisers: Are Automated Investment Platforms Acting in Your Best Interest?


Litz, Dominic, The Journal of High Technology Law


I. Introduction

Robots are not taking over the world, but they are becoming more prevalent in everyday life, making daily chores simpler and even eliminating jobs altogether. (1) One industry that is heavily influenced by trends in technology is investment management. (2) Traditionally, an individual will seek the advice and services of a financial planner or an investment adviser to manage their money to save for retirement, increase their personal wealth, or diversify their personal assets. (3) Robo-advisers, an emerging form of investing, manage a client's funds on an automated investing platform, usually by way of investing in Exchange Traded Funds ("ETFs"). (4) A traditional human adviser may substantially profit from a commission-based or transaction-based fee, which differs from robo-advisers that operate on algorithmic investing and typically profit from flat fees. (5)

Robo-advisers have been on the rise in recent years, as small independent automated investment platforms seeking to attract a younger generation of investors. (6) Robo-advisers initially made their way into the market by targeting the "millennial" generation given their attraction to the technology based platforms, low fee structure, and a hands off approach to investing and saving for retirement or growing personal wealth. (7) Robo-adviser accounts are easy to set up and begin investing with: there is a short questionnaire to calculate an investor's risk tolerance, the investor deposits money, and the algorithm creates and maintains an individualized diversified portfolio, usually consisting of ETF, for the client. (8) Similar to the expectations of traditional investment advisers, clients may expect their robo-advisers to be regulated by a governmental or regulating agency and held under a strict fiduciary duty, so their assets and investments are invested in a way that is in their best interest. (9)

It is no surprise that technology plays a key role for investment firms, considering it has become a major facet in basic, everyday life. (10) In order to protect investors and provide transparency, the Department of Labor ("DOL") recently released a new rule, the Conflict of Interest Rule (the "Final Rule" or "Rule"), that will create a more stringent fiduciary standard, which seeks to eliminate all conflicts of interest between a client's best interest and an advisers desire to maximize their compensation. (11) The Final Rule's proposed implementation was originally April 2017, but with the new administration, the DOL has proposed a sixty-day delay from the phased implementation and continually delayed full implementation. (12) Shortly after the delay, the DOL has begun to implement this standard, requiring all investment advisers to act in their clients best interests. (13) Notwithstanding the delay, there is still confusion on how this standard will apply to robo-advisers and what their clients need to understand. (14) The Final Rule focuses on documenting recommendations and communications between advisers and clients; however, robo-advisers have little to no interaction with their clients past the initial account set-up. (15) Since more robo-adviser start-ups are increasing their assets under management ("AUM") and large investment firms are acquiring their own robo-advisers, there will likely be a hike in fees and costs to invest in these types of platforms as well as some regulation. (16) In anticipation of a shift towards lower cost investment advice, robo-advisers are hopeful the DOL's Final Rule will drive more customers to utilize their platforms, increasing an already growing business for them. (17)

This Note analyzes the DOL's Final Rule and its definition of fiduciaries and how under this Final Rule, robo-advisers may be considered fiduciaries, but fall short of meeting this strict standard. Part II of this note beings with background of the fiduciary standard, the DOL's Rule and certain exceptions to the Rule, and conflicts which could arise from a breach of these duties. …

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