Tag:Massachusetts Securities Division

Massachusetts issues guidelines for using third-party robo-advisers
U.S. Regulatory Scrutiny of Robo-Advisers and Other Providers of Digital Investment Advice

Massachusetts issues guidelines for using third-party robo-advisers

By Susan P. Altman and C. Todd Gibson

In April 2016, the Massachusetts Securities Division issued a policy statement with respect to the fiduciary obligations of state-registered advisers providing robo-advice.  The MSD has now issued further regulatory guidance in a new Policy Statement with respect to the use of third-party robo-advisers by state-registered investment advisers.  The MSD noted the significant growth in popularity of third-party robo-advisers and the increasing number of state-registered investment advisers working with third-party robo-advisers.

The new guidance describes minimum disclosure that state-registered investment advisers using third-party robo-advisers must provide to investors in order to meet Massachusetts regulatory requirements, including:

  • Clearly identifying the robo-advisers and explaining their services;
  • Notifying investors that, when applicable, they could get the services directly from the robo-adviser without paying additional fees to the state-registered investment adviser;
  • Describing the value provided to the investor by the state-registered investment adviser;
  • Specifically identifying the services the state-registered adviser cannot perform, such as having no ability to access, select, change or customize the portfolio structure or investment products at the robo-adviser;
  • Identifying limitations of available investment products offered to the client through the robo-adviser; and
  • Using customized, easy-to-understand disclosure language.

Most importantly perhaps, the investment advisers must charge an advisory fee that is reasonable in light of fees charged by others providing essentially the same services.  An investor is usually charged a fee by both the investment adviser and the robo-adviser based on a percentage of the investor’s assets under management.  Massachusetts state-regulated advisers will have to demonstrate the value behind the fees they charge on top of the robo-adviser’s fees, such as specialized knowledge of the products or the investor’s personal circumstances.

The Policy Statement can be found here.

U.S. Regulatory Scrutiny of Robo-Advisers and Other Providers of Digital Investment Advice

By C. Todd Gibson

Recently, regulators in the US have issued guidance with respect to providers of automated investment advice, including robo-advisers.  On April 1, the Massachusetts Securities Division (“MSD”) issued guidance questioning whether a Massachusetts state-registered robo-adviser could fulfil its fiduciary obligations without some element of human-provided services (including initial and ongoing due diligence), stating that the registration of such advisers would be reviewed on a case-by-case basis.  Of particular concern to the MSD were “fully-automated” robo-advisers, characterized as those that: 1) do not meet with or conduct significant (or any) due diligence on a client, 2) provide investment advice that is minimally personalized, 3) may fail to meet the high standard of care that is imposed on the appropriateness of investment advisers’ investment decision-making, and 4) specifically decline the obligation to act in a client’s best interests.

FINRA, the US self-regulatory organization for broker-dealers, also recently published a report after having discussions with member firms and others with respect to the use of “digital investment advice.”  Although the report did not purport to create any new legal requirements or change any existing regulatory obligations for brokers, FINRA identified certain practices they believe brokers should consider when using digital tools.  The report focused on digital tools (including robo-advice) used by firms to perform client services.

US investment advisers, through application of the anti-fraud provisions of the Investment Advisers Act of 1940 and interpretations of US courts and regulators, owe a general fiduciary duty to their clients.  With the recent proliferation and growth of complex, automated investment advice, regulators are becoming more focused on the use of such tools in the context of existing regulatory and fiduciary obligations.

The MSD policy statement can be found here and the FINRA report can be found here.

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