Earlier this week the Department of Labor (“DOL”) released new rules aimed at ensuring providers of retirement investment advice adhere to a fiduciary standard – that is, to put the best interests of clients first and above all. This may seem like an obvious point but as we wrote here many investors have no idea what a fiduciary is or if their service provider follows such a standard.

So-called robo-advisors are expected to be the beneficiaries of clients rushing for low-cost, ‘customized’ (ha!) fiduciary advice. These online services provide automated, algorithm-based investing and are assumed by the DOL to provide low-cost access to conflict-free advice. They focus on investments as though they are the only piece of the puzzle. As a result human beings are cut out of the loop and services are limited. No advice is provided or integrated with equally important financial puzzle pieces such as taxation, estate planning, insurance, cash flow, company benefits, Social Security, etc.

But as we have written about here, here and here Apollo believe robo-advisors are more sizzle than steak. We believe they are unable to act in a fiduciary capacity.

In the wake of the DOL’s ruling the Massachusetts Securities Division agrees:

“It is the position of the Division that fully automated robo advisors, as currently structured, may be inherently unable to carry out the fiduciary obligations of a

[state-registered] investment adviser.”

The position is based upon research by Fein Law Offices. Melanie Fein argues the DOL’s assumptions are flawed. Furthermore she argues that robo-advisors:

  • are overly simplistic
  • provide recommendations based upon incorrect assumptions, incomplete information and circumstances not relevant to an individual investor
  • are not free from conflicts of interest
  • do not minimize investment costs
  • do not meet a high standard of care for fiduciary investing and do not act in the client’s best interest

The full Fein report may be found here.