All Fiduciaries Aren’t Created Equal


Robo-advisors have had a significant — and generally positive — impact on the financial services industry. The term typically refers to services that use models and algorithms to invest client portfolios, often in exchange-traded funds (ETFs). A benefit much touted by some of these services is that there’s no interaction with a human advisor. The entire process is done online. Betterment andWealthfront are the leading robo-advisors that fit into this category.

Lower fees

Because these robo-advisors are automated, they have significantly lower expenses than traditional investment advisors. Here’s Betterment’s fee schedule, which it offers through a wrap fee program:

  • 0.15 percent for accounts with balances greater than $100,000
  • 0.25 percent for accounts with balances between $10,000 and $100,000
  • 0.35 percent for accounts with balances below $10,000

Fiduciary duty

Robo-advisors are SEC-registered investment advisors. Under both common law and federal statutes, SEC-registered investment advisors owe a “fiduciary duty” to their clients.

There is much confusion over what a “fiduciary duty” entails. According to the Institute for the Fiduciary Standard, SEC-registered investment advisors have the following obligations to their clients:

  • Serve the client’s best interest
  • Act in utmost good faith
  • Act prudently, with the care, skill and judgment of a professional
  • Avoid conflicts of interest
  • Disclose all material facts
  • Control investment expenses

A lower standard

Most brokers are not SEC-registered investment advisors. They don’t have a fiduciary duty to their clients. They are held to a much lower “suitability” standard, which permits them to sell higher-price, higher-commission products to their clients, even though the expected returns of these products may be lower than readily available lower-cost investments.

The securities industry has done a great job of obscuring the distinction between a fiduciary advisor and someone with only a “suitability” obligation. If investors understood the difference, few would elect to entrust their hard-earned money to anyone who wasn’t held to the fiduciary standard.

The DOL rule

The U.S. Department of Labor recently issued a rule requiring those who advise retirement plans to act as “fiduciaries” to their clients. While this rule has some loopholes and doesn’t apply to advice in non-retirement settings, overall it’s still a very positive development for retirement plan participants.

Sound investment advice, but…

The investment advice offered by most robo-advisors is generally sound. They advocate using a globally diversified portfolio of low-fee exchange-traded funds. They rebalance portfolios to keep their clients within their tolerance for risk and some offer tax loss harvesting to capitalize on downturns in the market.

Different levels of fiduciary advice

However, being a true “fiduciary” to clients may require more expansive services and interaction with a human advisor. A policy statement updated in April by the Massachusetts Securities Division could pose a threat to the business model of fully automated robo-advisors. William Francis Galvin is the Secretary of the Commonwealth of Massachusetts. He heads the state’s Securities Division. Mr. Galvin is generally regarded as a leader in protecting the rights of investors. Actions taken by his agency are closely followed by other state and federal regulators.

The policy statement makes the compelling point that both robo and traditional advisors are governed by the same fiduciary standard, yet robo-advisors, through disclaimers and otherwise, render advice far less expansive than traditional advisors. Specifically, fully automated robo-advisors have no personal interaction with their clients, “minimally personalize” their investment advice, may not meet the high standard of care imposed on traditional advisors for their investment decisions, and sometimes disclaim the obligation to act in their clients’ best interest.

The policy statement concludes that fully automated robo-advisors may be “inherently unable to act as fiduciaries.” Consequently, the state regulatory body will evaluate their suitability for registration, with certain guidelines in mind, on a “case-by-case” basis. The clear import is that fully automated robo-advisors may not be approved for registration in Massachusetts.

If this position is adopted by other states, it may be the death knell for fully automated robo-advisors. They may have to adjust by changing their disclaimers and adding the ability for clients to interact with qualified investment advisors. This is the approach taken by Vanguard.

The takeaway

The rise of robo-advisors has generally been a very positive development for investors who may not meet asset thresholds set by traditional advisors. They provide sound investment advice, at a low cost. They are serving primarily smaller investors who traditional advisors could not serve in a cost-effective manner. However, they may have overreached by conveying the impression the fiduciary advice they provide is equivalent to what investors receive from human advisors governed by the same legal standard.

The Massachusetts Securities Division’s policy statement is correct in highlighting this difference in service. The lesson for investors is two-fold:

  1. Insist that all registered investment advisors are held to the same high fiduciary standard.
  2. Don’t entrust your money to anyone who will not agree in writing to a fiduciary obligation.

This commentary originally appeared June 7 on

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