MacKillop proposes that a new regulatory niche should cover robos as a type of product platform regulated more like a mutual fund than a financial advisor.
Ideally, new regulations would establish standards for disclosures, portfolio management, fees, marketing and the protection of client data on robo-advisory platforms, while still allowing them to service clients accumulating a retirement nest egg at low cost, he says.
Under MacKillop’s scheme, anything that results in the creation of an investment portfolio and includes a measure of human advice, including hybrid services incorporating both robots and humans, would continue to register as investment advisors.
“Pure” technology providers that offer robo-advisory services solely to advisors would register as investment advisors, while those who simply offer calculators, account aggregation tools and account opening functionality would be exempt from registration. The pure technology providers would be held to the fiduciary standard for all services provided to advisors, while advisors would assume all of the fiduciary responsibility to the client.
McGrew disagrees, arguing that robo-advisors should adapt and evolve to meet the requirements of the Advisers Act and the fiduciary standard.
“I think robo-advisors need to be reconciled with existing law, rather than having a regulatory carve-out that suits them,” McGrew says. “I believe that they should be used hand-in-hand with actual advisors. That human component, the ability to understand and consistently track a client and their goals, is what makes fiduciary advice possible.”
That reconciliation would require not just a call center of advisors, says McGrew, but full personalization of advice and, potentially, a one-on-one relationship with a human planner—but such a move would be costly.
As robo-advice platforms add humans into the equation, it may spoil the robo-advisor’s primary draw: low minimums and low fees. Betterment’s recent announcement was accompanied by a raise in asset-based fees from 15 to 25 basis points.
That’s a shame, says MacKillop, as the low-cost robo-advisor deserves a place in the financial industry.
“We need a niche for these kinds of programs and to regulate them accordingly,” MacKillop says. “I think that robo-advisors are great technology and they provide a good service. When you come down to it, they can’t be fiduciaries because of their nature. They can’t have the kind of knowledge that’s necessary to exercise true fiduciary duties or to build trust with a client.”