The Evolution of Advice: Digital Investment Advisers as Fiduciaries

October 2016

The landscape for investment advice is shifting, and an innovative model has emerged that combines technology and investment expertise to deliver high-quality advice at a lower cost than traditional investment advisory services.

Digital or so-called “robo” advisers that use algorithms and technology to offer discretionary investment advice through managed accounts are growing in popularity. The emergence of digital advice is particularly significant for investors who were not previously able to access any advice because of the minimum balances required by other service models, but investors at every level of wealth have been drawn to the value, accessibility and transparency offered by digital advice.

Many industry participants have commented on the transformative potential of digital investment advice.  Of particular note, the Chair of the US Securities and Exchange Commission (“SEC” or “Commission”) observed that digital investment advice holds the “positive potential to give retail investors broader, and more affordable, access to our markets.” Other commentators have questioned whether digital advisers can meet the standards to which they are subject as fiduciaries under the Investment Advisers Act of 1940, as amended (“Advisers Act”), or whether it is necessary to consider new standards. Although such questions are fair given the rapid growth of digital advice and the importance of ensuring that retail investors have access to high-quality investment advice, these critics tend to proceed from misconceptions about the application of fiduciary standards, the current regulatory framework for investment advisers, and the actual services provided by digital advisers. 

This White Paper explores the application of fiduciary standards to digital advisers.  It concludes that fiduciary standards, such as those incorporated into the Advisers Act, are flexible principles that digital advisers and their nondigital counterparts (traditional advisers) are equally capable of satisfying. Investors benefit from this regulatory flexibility, which encourages innovation and permits the development of more varied services. Indeed, the Advisers Act already accommodates investment advisers with a wide variety of business models, investment strategies, and services. This White Paper also explains that the products and services offered by digital advisers are not unique, but instead are technologically enhanced versions of advisory programs and services that have long been subject to this flexible regulatory framework.  Finally, this White Paper discusses the innovative and powerful ways that digital advisers can more effectively serve their clients, including by harnessing the efficiencies of technology and insights from behavioral finance.

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