Robo-Advisors - Market Impact and Fiduciary Duty of Care to Retail Investors

Abstract

Robo-advisor is a product of the current wave of digitalization. This phenomenon is referred to as the 4th industrial revolution based on the implementation of artificial intelligence and robotics. This article explores the impact of robo-advisors on the wealth management industry and examines their capability of providing the same fiduciary duty of care as human financial advisors. Robo-advisor was built on the principle of lower management fees through passive investment vehicles, 24/7 access to client’s portfolio on mobile devices, easier onboarding processes, and algorithm enhanced decision making for less sophisticated investors who would otherwise not be qualified for a traditional human financial advisor. Traditional wealth managers and private bankers viewed the technology as a mass market way of delivering cheap basic services and thus not relevant to serve their high end clientele. However, robo-advisor is poised to grow at a rate of 33% annually over the next five years. To gain market share, incumbent wealth management firms are imitating the robo-advisor business model by creating in-house robo platform and positioning themselves via strategic acquisitions and partnerships. The Robo-advisor algorithms has brought new regulatory challenges to the industry, critics argued that robo-advisors compromise the fiduciary duty of care when providing financial advice to its clients because it doesn’t offer enough personalized financial advice to clients. However, the research shows that the fiduciary duty of care is managed with the use of modern portfolio theory (MPT) and by providing full disclosure of any conflict of interest to client which is permissible, as long as they are disclosed to the clients. The study is a systematic literature review conducted using electronic databases that covers the period from 2015 to 2020.