The rise of automation and artificial intelligence has been revolutionizing industries across the spectrum with increasing speed and breadth. Technological innovation promises massive improvements in efficiency, accuracy and price, but may pose an existential threat to employment by making human labor obsolete. And it appears the financial and investment industries have not escaped this creeping trend towards automation. The exponential rise of “robo-advisors” – algorithm-driven investment advisors – over the past decade has sparked major changes within these industries. In order to survive the “rise of the robots,” it is essential for both humans and the law to understand the full potential of automation to revolutionize the investment industry – and to adapt accordingly.
What are Robo-Advisors?
Robo-advisors, as they are colloquially named, refer to “digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision.” They typically function by gathering information from clients about their current financial status and investing goals, and then combine that information with market analysis to create and manage a portfolio. The earliest form of financial planning software was limited to automated portfolio allocation. Since then, the technology has advanced significantly, and robo-advisors are now able to handle sophisticated tasks like retirement planning.
How Have Robo-Advisors Changed the Investment Industry?
The technology and algorithms used by robo-advisors have existed for decades; however, in the past these programs were used exclusively by financial firms on behalf of their clients. In 2008, Betterment LLC became the first firm to offer automated financial services on a direct-to-consumer basis. The cost-effectiveness of the algorithms, combined with further savings from eliminating the human advisor “middlemen,” means that “robo-advisors are able to charge significantly less than traditional wealth management services, making them an appealing option for young investors and others with low account balances.” The market appeal of this model caught on quickly, and with the addition of several other robo-advisor companies, robo-advisors have accumulated $45 billion in combined assets-under-management (“AUM”). Experts project that the AUM for robo-advisors could skyrocket to anywhere from $500 billion to $2.2 trillion by 2020.
The gains of this new industry segment have not gone unnoticed by traditional wealth management firms. Large organizations, including most recently Wells Fargo, are launching robo-advisor platforms to augment their other wealth management services. However, these companies often still require relatively high minimum investments or account minimums, and investors are subject to higher fees and rates. For example, Wells Fargo will require a minimum of $10,000 to open an investment account with their robo platform, and those accounts will be subject to fees, including a 0.50% advisory fee, while Betterment does not have an investment minimum and charges no advisory fee on the first $10,000 invested. Given this cost disparity, it is likely that firms such as Wells Fargo may still have a way to go in terms of offering a competitive option to the next generation of investors.
Despite these advances, some large firms are unconvinced that robo-advisors pose a serious threat to human brokers. James Gorman, Chief Executive at Morgan Stanley, maintains that clients will still want to talk to a live advisor, especially on complex matters. Gorman also believes that while new technology may help facilitate relationships with human advisors, it will never replace them. Even though executives large traditional investment firms claim they do not feel threatened by robo-advisors, many of these same firms, including Morgan Stanley, JPMorgan, and Bank of America Corp’s Merrill Lynch, are currently piloting robo-advisor platforms. This shows that, despite their espoused nonchalance, key players in the investment industry are responding to the growth of automated advising, and investing in similar technologies
On the other side of the spectrum, some robo-advisors, including Betterment, are shifting towards traditional investment management platforms by introducing access to human advisors as an optional function of their automated platform. These shifts toward a middle ground indicate that the investment industry as a whole may be moving closer to a hybrid model: a combination of both traditional human and automated advisors.
What are the Legal Implications of Robo-Advisors?
Various legal professionals and industry regulators have questioned whether robo-advisors can meet the fiduciary standards required under the Advisors Act (“the Act”), the primary legislation that regulates financial advisors. In the broadest sense, the Act obligates advisors to act in the best interest of their clients and to provide investment advice that is in the best interest of their clients. The Act, which was passed in 1940 as part of the New Deal, was designed to monitor human behavior in the field of investment management. In response to the growing trend in automated investing, the SEC has continually issued guidance for robo-advisors to ensure they are meeting their fiduciary obligations under the Act and other applicable regulations. This guidance emphasizes transparency by requiring robo-advisors to disclose their business models and how they utilize consumer data. However, other industry professionals have countered the position of federal regulators by pointing to the fact that, since robo-advising platforms are based on algorithms, robo-advisors cannot be induced to make illicit deals or transactions, and as such are fully capable of fulfilling a fiduciary duty.
Robo-advisors have spurred radical changes within the investment and wealth management industries. They offer significant cost and efficiency advantages over human advisors, which make them an appealing option to the newest generations of investors. And while some traditional investment management firms maintain that human brokers will always be a necessary part of the investing process, it is unlikely that the role of human advisors will remain unaffected by the pervasive growth of robo-advisors.
 Megan Ji, Note, Are Robots Good Fiduciaries? Regulating Robo-Advisors Under the Investment Advisors Act of 1940, 117 Colum. L. Rev. 1543, 1544 (2017).
 Investopedia, https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp.
 Richard D. Marshall, Robo-Advisors: More Complex Than They May Appear, 49 SRLR 1267 (2017), https://www.kattenlaw.com/files/214853_spRobo_SRLR_8717.pdf.
 Investopedia, supra note 2.
 Ji, supra note 1, at 1544.
 See Marshall, supra note 3.
 See Ji, supra note 1, at 1544.
 Lisa Beilfuss, Wells Fargo Launches Robo-Investment Service, Wall Street J. (Nov. 6, 2017, 4:58 PM), https://www.wsj.com/articles/wells-fargo-launches-robo-investment-service-1510005480.
 Liz Hoffman, Morgan Stanley Chief Says Firm’s Brokers Will Maintain Key Position, Wall Street J. (Sept. 27, 2017, 6:37 PM), https://www.wsj.com/articles/morgan-stanley-chief-says-firms-brokers-will-maintain-key-position-1506551837.
 Id. See also, Julie Verhage, It Looks Like JPMorgan Is Building a Robo Advisor, Bloomberg (Apr. 5, 2017, 11:15 AM), https://www.bloomberg.com/news/articles/2017-04-05/it-looks-like-jpmorgan-is-building-a-robo-adviser.
 Anne Tergesen, Betterment Adds More Human Advice to its Robo Services, Wall Street J. (July 26, 2017, 9:00 AM), https://www.wsj.com/articles/betterment-adds-more-human-advice-to-its-robo-services-1501074001.
 See Ji, supra note 1, at 1544.
 U.S. Sec. and Exchange Commission, Information for Newly-Registered Investment Advisers (Nov. 23, 2017), available at https://www.sec.gov/divisions/investment/advoverview.htm.
See Ji, supra note 1, at 1544.
 U.S. Sec. and Exchange Commission Division of Inv. Mgmt., IM Guidance Update (2017), available at https://www.sec.gov/investment/im-guidance-2017-02.pdf.
 See Ji, supra note 1, at 1546.