Roboadvisors are facing skepticism from a top government official in a state that's full of fundsters.

Bill Gavin Commonwealth Secretary of Massachusetts Commonwealth

On Friday the securities division under Bill Galvin, Massachusetts' Secretary of the Commonwealth, issued an eight-page "policy statement" about "robo-advisers and state investment adviser registration." The upshot is that Galvin's people think that direct-to-consumer roboadvisors may have to change their ways if they want to operate as RIAs in the Bay State.

"Fully automated robo-advisers, as currently structured, may be inherently unable to carry out the fiduciary obligations of a state-registered investment adviser," the statement reads. "Until regulators have determined the proper regulatory framework for automated investment advice, robo-advisers seeking state registration in the Commonwealth will be evaluated under the foregoing guidance on a case-by-case basis."

Robo-advisers in the Commonwealth cannot fully satisfy their fiduciary obligations if they fail to perform the initial and ongoing due diligence necessary to act in the best interests of their clients. Specifically, robo-advisers' failure to conduct due diligence, as well as robo-advisers' depersonalized structure, may render them unable to provide adequately personalized investment advice and make appropriate investment decisions ...

Robo-advisers attempt to avoid the issues raised by the structure of their automated investment services, discussed above, by specifically disclaiming various duties in customer agreements and elsewhere. These disclaimers are typically embedded in a lenghty electronic client agreement that must be "signed" by the client before services can be provided. But robo-advisers cannot act as fiduciaries as required under the law in the Commonwealth while, at the same time, disavowing their central fiduciary obligations.

Bloomberg, Boston Business Journal, Financial Planning, and InvestmentNews all picked up on Galvin's warning to roboadvisors. 

Edited by: Neil Anderson, Managing Editor


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