Robo Advisors meet regulator opposition

Industry body questions automated investment services and Canadian advisors give us their reaction

Robo advisors have grabbed a lot of headlines in recent months with suggestions that they may even be able to replace traditional financial advisors in the long term. However, now a regulator has questioned whether they can act in the best interest of clients.

According to a Bloomberg report, Massachusetts Secretary of State William Galvin issued a statement outlining plans for the US state to evaluate robo advisors on a case-by-case basis after hinting that they may not be able to perform the functions of an investment advisor and act as fiduciaries.

“Entities that create computer-generated portfolios but fail to do the necessary customer due diligence to know their customers and who specifically decline most, if not all, the fiduciary duty are not performing the duties of investment advisers,” he said.

According to the statement, the policy will focus on fully automated services.

However, what about here in Canada?

Declan Ramsaran, managing director of PANGEA Private Family Offices, believes that the intention of the regulator is probably designed with investment advisors in mind.

“The reasons expressed by some regulators that robo advisors may inherently be unable to act as fiduciaries and perform the duties of a state-registered investment adviser is likely born from a concern to protect investors - and that’s a good intention,” he said.

“Generally, robo advisor firms are founded by seasoned investment professionals or existing investment management firms that are quite familiar with securities regulations, compliance requirements, fiduciary and due diligence responsibilities. Knowing this fact should mitigate, to some degree, the concerns expressed by some US securities regulators. Consider that Charles Schwab and Vanguard currently have a robo advisor offering: it is unlikely that Schwab or Vanguard is failing its due diligence duties and being lax in their client fiduciary duties.
“We must consider that some self-directed investment account providers have, for several years now, been proving clients with model portfolio recommendations and rebalancing notices - the service just wasn't labelled robo-advisor. I don't recall securities regulators being publicly concerned about these offerings that were around years before the term robo advisor became popularized.

“Robo advisor firms not directly registered with securities regulators may or may not be providing investment solutions from third party investment managers who are directly registered with securities regulators. This is one type of robo advisor structure that should attract the attention of regulators to ensure that investors are protected appropriately.”

Meanwhile, Mallory Greene, marketing manager at WealthSimple, believes her company is already meeting regulatory requirements.

“At Wealthsimple, we’re registered with the Ontario Securities Commission and we do provide personal investment advice to understand our clients’ unique financial needs,” she said. “I believe we offer far more transparency than the traditional bank in Canada currently does and, to me, that’s working in the best interest of our clients.”

What is your opinion on the regulation of robo advice? Leave a comment below with your thoughts.