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SEC Must Fix Double-Standard Applied to Robos

August 29, 2017

Human advisors are being held to a more stringent fiduciary standard than their robo counterparts, and the SEC must step in before the standard gets diluted as a result, Scott MacKillop writes in InvestmentNews.

The simple client questionnaires robo-advisors use to devise portfolio recommendations don’t stand up to the rigors of the fiduciary standard faced by human advisors, according to MacKillop, CEO of First Ascent Asset Management.

Robo questionnaires are typically no longer than 12 questions — and often don’t even give an option to include additional information, MacKillop writes.

If a human advisor were to rely on such questionnaires alone without speaking to the prospect, they would be hard-pressed to determine the prospect’s financial situation and investment objectives and then devise an appropriate portfolio, he writes. And it’s unlikely the SEC in such a case would consider the advisor’s fiduciary duty as having been met, according to MacKillop.

A law firm that represents robo-advice pioneer Betterment wrote last year that robos satisfy their fiduciary obligations because they disclose to clients their limited set of services and lack of direct interaction. But that approach does away with the traditional understanding of a fiduciary duty, according to MacKillop.

The SEC risks establishing a dangerous precedent by which human advisors could ape this approach and simply say they’ve met their fiduciary obligations, he writes.

Scott MacKillop

Direct-to-consumer robo-advisors are “essentially online vending machines for managed portfolios,” according to MacKillop. They certainly serve a purpose, helping investors who choose to go it alone with organization and basic guidance on building a portfolio, he writes. But regulators need to treat robos differently than human financial advisors, according to MacKillop.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.