Massachusetts Robo-Advisor Guidance

On Friday April 1, the Massachusetts Securities Division (Division) released guidance on how the Commonwealth will treat robo-advisors seeking state registration. Robo-advisors will be evaluated under the foregoing guidance on a case-by-case basis, until there a regulatory framework is created.

The Division defines robo-advisors as both advisors that are fully automated and advisors that utilize asset allocation algorithms with human services. Robo-advisors are viewed by the Division, as investment advisers who owe the typical fiduciary duties of loyalty and care to their clients. The Division believes that currently robo-advisors cannot satisfy their fiduciary duties because they fail to perform initial and ongoing due diligence to act in the clients’ best interest by:

  • requiring the client to provide updated information;
  • not verifying the accuracy of information provided by the client;
  • not gathering enough information in the initial stage;
  • using a depersonalized structure resulting in inadequate personalized investment advice;
  • being unable to determine if a client has a diminished capacity;
  • failing to conduct periodic reviews of client accounts;
  • and leaving it to the client to determine the appropriateness of the automated investment service.

The Division strongly believes that an investment adviser’s duties to conduct due diligence cannot be cured by written disclaimers in client agreements. A complete and blanket disclaimer of any fiduciary relationship is viewed as ineffective meaning the Division will not permit the core fiduciary relationship to be eliminated. With the increase of firms offering robo-advisors, we expect that more states will begin weighing in on this area.

The guidance can be found here.

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