Which do you trust more to invest your hard earned cash: a computer or a seasoned, trained licensed financial adviser? If a computer was your answer, then we hope this article gives you pause before taking the inevitable leap of faith required anytime you exchange money with another, human or otherwise, for a promise of a return on your investment. This article highlights potential problems regarding what the Financial Industry Regulatory Authority (FINRA) refers to as digital investment advisers, but what we hereinafter call robo-advisers, and is not intended as an argument against their use. We accept as fact the usefulness of computerization as we accept the uselessness of unpassed regulations. Of robo-advising we, like everyone else without experience in coding complex computer algorithms, know nothing about how or what voluminous data is processed in the nanosecond it takes a robo-adviser to decide where best to invest your money. What we do know, however, is there are specific issues involving the suitability requirement and fiduciary duty imposed on robo-advisers.

A robo-adviser, for the purposes of this article, is a fully automated, algorithm-based financial adviser that provides investment advice based on a client’s responses to a pre-programed questionnaire—all done online with no human service. These are among over 200 robo-adviser services, with varying levels of human service, available in the United States. Robo-advisers are appealing to investors for a number of reasons, mainly by eliminating a potentially costly human “middle man” and being accessible 24 hours, 7 days a week. Where approximately 92 percent of human financial advisers require their clients have at least $100,000 in assets, some robo-advisers will take on a client with a minimum account balance of zero. Obviously, this is designed to appeal to large swaths of the population hitherto unable to afford financial advice. With roughly one out of every two nongovernmental employees not participating in some kind of retirement plan, easy-to-use robo-advisers target a large market with a clear need. However, providing financial advice to such large percentages of investors raises concerns over whether robo-advisers meet the suitability standards of FINRA Rule 2111, and fulfill their fiduciary duty under the Investment Advisers Act of 1940, as amended (the Advisers Act), and the impending change to the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA) promulgated by the U.S. Department of Labor.

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