Tuesday, July 19, 2016

Massachusetts guides IAs who use robo-advisers

By Jay Fishman, J.D.

The Massachusetts Securities Division has issued regulatory guidance for its state investment advisers who use third-party robo-advisers to provide advisory services to clients. The need for guidance arose from the Division’s discovery during its application review process that advisers were stepping up their use of robo-advisers to service clients.

Policy statement. The Division issued a policy statement in April 2016 proclaiming that because automated robo-advisers, unlike traditional human investment advisers, cannot provide fiduciary duties to clients, the Division would evaluate their Massachusetts registration applications on a case-by-case basis.

Regulatory guidance. Now, following the increased use of robo-advisers, the Division has issued this regulatory guidance for its state investment advisers. The guidance tells state investment advisers who use robo-advisers to provide their clients with asset-allocation and trading functions that, at a minimum, the advisers:
  • Must clearly identify any third-party robo-advisers with which they contract; must use phraseology that clearly indicates that the third party is a robo-adviser or otherwise utilizes algorithms or equivalent methods in the course of providing automated portfolio management services; and must detail the services provided by each third-party robo-adviser;
  • If applicable, must inform clients that investment advisory services could be obtained directly from the third-party robo-adviser;
  • Must detail the ways in which they provide value to a client for their fees, in light of the fiduciary duty they owe the client;
  • Must detail the services that they cannot provide to the client, in light of the fiduciary duty they owe the client;
  • If applicable, must clarify that the third-party robo-adviser may limit the investment products available to the client (such as exchange-traded funds, for example); and
  • Must use unique, distinguishable, and plain-English language to describe the adviser’s and the third-party robo-adviser’s services, whether drafted by the adviser or by a compliance consultant.