FINRA's Report on Robo-Advisors: Fiduciary Implications

14 Pages Posted: 24 Apr 2016 Last revised: 7 May 2016

Date Written: April 1, 2016

Abstract

The Financial Industry Regulatory Authority (“FINRA”) recently issued a report on robo-advisors entitled “Report on Digital Investment Advice.” The report addresses the various features of robo-advisors and highlights investor protection concerns and regulatory issues that may arise from their use by investment professionals and individual investors. The report implicitly raises the question of whether robo-advisors meet the fiduciary standard of care applicable to broker-dealers and investment advisers. The report suggests that, on a stand-alone basis, robo-advisors do not meet a fiduciary standard when they advise individual investors. The report supports the view that human judgment by a trained financial professional is a necessary element of the fiduciary standard. This paper analyzes the findings and implications of the FINRA report in light of the fiduciary standard of care and poses questions that need to be answered by regulators concerning the fiduciary standard to which robo-advisors — as well as investment advisers and broker-dealers — will be held in the future.

Keywords: fiduciary, standard of care, robo-advisor, robo-adviser, robo adviser, FINRA, suitability, investment advice, investment adviser, broker-dealer, Investment Advisers Act of 1940, Massachusetts Securities Division, digital investment advice

Suggested Citation

Fein, Melanie L., FINRA's Report on Robo-Advisors: Fiduciary Implications (April 1, 2016). Available at SSRN: https://ssrn.com/abstract=2768295 or http://dx.doi.org/10.2139/ssrn.2768295

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