Robo-Advisers Create Challenges for Plan Fiduciaries

Plan sponsors must carefully vet robo-adviser offerings to participants.

By Javier Simon | November 10, 2016
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When Baby Boomers first started saving for retirement, the term “robo-adviser” probably sounded like something out of science fiction; but more and more of the wider financial services industry is embracing this technology, which offers automated investment advice based on complex algorithms and individuals’ unique financial information.

Initially, robo-advice was reserved for retail investors, experts explain, but it is now moving deeper into the individual retirement account (IRA) and 401(k) markets. Traditional advice providers have clearly taken notice of the new entrants, with many moving in to implement their own take on robo.

One of the new entrants, Betterment, earlier this year began offering an automated 401(k) recordkeeping platform, which provides employers with dashboard plan management and participants with an account aggregation tool, allowing them to sync outside financials including IRAs with their Betterment account.

Established brokerage firms are also working to better serve participants pushing closer toward retirement via robo-advice approaches—with a particular eye towards capturing IRA rollovers. According to global research firm Cerulli Associates, investors in 2013 alone rolled $324 billion from 401(k) accounts into the $6.5 trillion IRA market. In an updated 2016 report, the firm projected the digital advice market to exceed $83 billion by the end of the year.   

While robo-advice is viewed by many as a major source of opportunity, it also presents plan fiduciaries with major challenges, such as choosing an appropriate robo-adviser that can comply with the pending Department of Labor (DOL)’s Conflict of Interest rule, which extends fiduciary responsibility to virtually anyone offering advice in a retirement plan. But can robots serve effectively as fiduciaries? Some industry experts believe so, while others aren’t as sure. Global law firm Morgan Lewis argued this point in its white paper “The Evolution of Advice: Digital Investment Advisors as Fiduciaries.”

The firm believes robo-advisers can act as fiduciaries under existing regulations imposed by the Securities Exchange Commission (SEC), including the Adviser’s Act, and the Department of Labor (DOL), “because they are essentially offering the same services conducted by human advisers.” Moreover, Morgan Lewis argues that the applicable standard of care is not an absolute concept, but rather a flexible one that is “defined by contract” and extends only to the “scope of service agreed to by the client.” The firm notes, “Under common law, the standard of care an agent owes to a principal varies depending on the parties’ agreement and the scope of their relationship.”

Still, critics argue that machines may not be able to gather enough information to make sound, individualized investment advice to meet certain goals such as saving for retirement.

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