All investment advisers must provide advice suitable for a particular client based on the client’s financial situation and investment objectives. Traditional investment advisers usually do this after getting to know their clients through conversations and other forms of direct communication.  Robo-advisers, by contrast, must accomplish this through other means.  Given this universal duty, it’s important for robo-adviser firms to not simply be aware of their fiduciary duty, but to contemplate how their client interaction differs from interactions a client may have with a traditional investment adviser, and determine how those differences effect the suitability of advice provided.

Unlike the traditional investment adviser/client relationship, the relationship that a robo-adviser develops with a client may be, and likely is, completely devoid of human interaction. The robo-adviser’s sole understanding of a client’s investment needs depends on the client providing enough information regarding personal history and investment preferences directly to the robo-advisory program. Regardless of what form a robo-adviser utilizes to capture client information, whether it be mobile application, online questionnaire, or some variation, a robo-adviser must be concerned from the outset that such information gathering is sufficient in its design and scope to accurately capture a client’s needs and investment preferences.

When designing its client information intake process, a robo-adviser should consider several best practices to ensure that the information it receives from a client is sufficient to meet its obligation as a fiduciary, such as:

  • Complete Information – Robo-adviser questionnaires should contain ample opportunities for a client to express his or her needs and wants. One of the primary selling points of a robo-adviser is convenience. However, such convenience cannot be delivered to a client at the cost of the robo-adviser’s fiduciary duty. For example, if it is possible for two clients with different investment goals to answer a simple intake form in a similar or identical fashion, then it is likely that the intake form is not sufficient for the robo-adviser to provide suitable advice.
  • Clarity – Another potential deficiency in a robo-adviser client intake form is a lack of clarity. In a traditional adviser/client relationship, a client has the ability to ask clarifying questions of his or her adviser when discussing investment needs. Robo-advisers should consider adding clarifying tools to their intake forms, such as examples discussing certain investment strategies, or pop-up-boxes, which a client could click on if he or she wanted additional information.
  • Inconsistencies – Client intake questionnaires should also be reviewed to ensure that all inconsistencies are removed. A client may not be able to readily determine if two answers that he or she provided are inconsistent. A robo-adviser could alleviate such a concern by incorporating design tools to alert a client when a provided answer is inconsistent with a pervious response.
  • Adequate Disclosure – In conjunction with its intake process, a robo-adviser should adequately disclose to a client the scope of its service. For example, if a particular robo-adviser only offers ESG investments that may affect how a client responds to the intake questionnaire.

As more investors turn to the convenience of robo-advisers, the greater the burden on a robo-adviser to provide suitable advice to each client. Unlike a traditional adviser, a robo-adviser is not able to easily assess the intricacies of a particular client through human interaction. It is therefore incumbent upon a robo-adviser to appropriately design its client intake to obtain all necessary information to fulfill its fiduciary duty while still maintain the convenience of its platform.

We’ll be back soon with our next post covering the firm registration process.