Massachusetts regulator Galvin questions robos’ ability to act as state-registered investment advisers

Many robo-advisers consider themselves fiduciaries, based on their registration under the Investment Act of 1940.
But Massachusetts’ securities regulator William Galvin is questioning the authenticity of such claims.

Mr. Galvin, the secretary of the commonwealth, said algorithm-driven robos that fail to learn about their customers and decline most fiduciary duties are not acting as investment advisers, referring to fully automated services looking to register in Massachusetts, he said in a statement from the Massachusetts Securities Division on Friday.

(More: Editorial: Can robo-advisers be fiduciaries?)

Fully automated robo-advisers “may be inherently unable to act as fiduciaries and perform the functions of a state-registered investment adviser,” Mr. Galvin said. “Robo-advisers seeking state registration will be evaluated under the foregoing guidance on a case-by-case basis.”

He also noted that because robos are basing their services on client answers provided in an online questionnaire, they are not collecting enough information to act in the client’s best interest. This goes for young clients, but also those who may be incapable of understanding their finances, such as those with diminished capacity.

“They may meet the needs of certain customers but this alone does not make them investment advisers,” Mr. Galvin said in the statement. “The fiduciary standards that apply to investment advisers will apply in equal measure to robo-advisers, and they cannot disclaim those away.”

The Department of Labor is expected to unveil its fiduciary rule, which will require all advisers to act in their clients’ best interests on retirement accounts, on April 6, according to the Wall Street Journal.

The statement recalls a complaint the division made earlier this year against Citizens Bank, which used an online platform under Envestnet, a wealth management technology provider, to create a senior investor’s portfolio of risky investments. The portfolio could not be modified, according to the complaint, and resulted in losses to the investor when liquidated. The case was closed and the investor was made whole, the policy statement said.

Robo-advisers have, on numerous occasions, asserted they are in fact fiduciaries. During a Fiduciary Focus roundtable hosted by InvestmentNews on Wednesday, six robo executives said they could provide holistic financial advice for all types of clients.

Last summer, Department of Labor Secretary Thomas Perez shined the spotlight on Wealthfront, calling the robo an example of a company acting in its clients best interests with low-cost advice. Many have argued these algorithms do not have a personal stake in client portfolios and can perform routine functions better than some humans.

Meanwhile, other regulators are figuring out what to do about the robos. Kara Stein, commissioner of the Securities and Exchange Commission, said the agency needs to examine to what extent these computers can offer advice, or if the people behind them need a license.