With the DOL conflict of interest rule, due to take effect April 10, 2017, looming large, many believe that robo advisors will fill the void of advisors not able or willing to act as fiduciaries on smaller retirement accounts and plans. So the natural question is whether these robo advisors can act as fiduciaries or, more to the point, can technology without human interaction fill the void? Morgan Lewis, a noted national law firm, address the question in a 19 page white paper.
Focusing on SEC rules while addressing the new DOL conflict of interest rule, Morgan Lewis concludes that, under certain conditions, these robos can act as fiduciaries and in some cases pose less conflict issues that human advisors. They have a duty to ensure that the advice given has a reasonable basis and that they have collected enough information to provide the advice.
Along with a need to serve smaller accounts, the drive to use technology to provide advice is driven by the desire for low cost investing which has also driven the dramatic growth of index funds and ETFs. While some investors prefer human interaction, others do not or cannot reasonably afford it. In fact, the top pure robo’s have attracted $45 billion while traditional firms like Vanguard and Schwab have garnered even more. Merrill Lynch recently announced that they will not allow their advisors to collect commissions on retirement accounts after April 10, 2017 leaving investors the option to move to a fee-based arrangement or to a brokerage account using a robo advisor.
Morgan Lewis goes on to point out that humans do create the models and, in some circumstances make professionals available for consultation in a hybrid model. No doubt that technology is changing our world and if computers will someday be able to drive our cars, it’s not out of the question that they will be able to reasonably suggest financial plans and models acting as a fiduciary in most cases cheaper than a human advisor and in some cases with fewer conflicts of interest.
