Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

If trusting your personal investment decisions to an automated "robo-adviser" seems too good to be true, you're not alone.

Massachusetts’ chief securities regulator, Secretary of State William Galvin, has set his sights on the booming robo-advisory industry, as Margaret Collins reported over the weekend. The conclusion from the state's Securities Division is that "fully automated robo-advisers, as they are typically structured, may be inherently unable to act as fiduciaries and perform the functions of a state-registered investment adviser."

Among the criticisms levied: The written disclaimers that investors sign off on (well, click off on anyway) often allow robo-advisers to circumvent standard fiduciary obligations and conflicts of interest. Also, robo-advisers do not typically consider assets outside of a client’s account, which may include wealth that would help inform an adviser's view of a client's needs and risks. Automated advisers may leave it to clients to provide updates about their financial situation and goals, rather than actively collecting them regularly. And brief online questionnaires may not be enough for a robo-adviser to even verify investors' identities or whether their mental faculties are diminished, let alone gather enough information to make informed financial decisions.  

It's not clear what effect, if any, this policy statement will have on the industry because it applies only to robo-advisers seeking registration in Massachusetts. So it won't cover most of the popular robo-advisers because they are federally registered with the Securities and Exchange Commission. Galvin didn't single out any firms. But the list of robo-advisers has grown rapidly, from startups like Betterment and Wealthfront to larger players like Vanguard and Charles Schwab that have introduced automated services. Various ballpark estimates put the services' assets under management in the trillions of dollars in coming years. Millennials in particular are expected to embrace robo-advisers. 

The Robot Revolution
Gen X and millennials are forecast by Deloitte to make up the bulk of robo-adviser assets in next decade.
Source: Forecasts by Deloitte for 2025.

Still, it's notable that the government in the state that Fidelity calls home is making noise about this topic just as regulators are attempting to write new rules on fiduciary duties for professionals who offer investment advice to individuals. Just how do the robots fit in? That's something commissioner Kara Stein wondered aloud at a conference last month, according to Investment News

“What would a fiduciary duty mean to a robo-adviser? Or suddenly, is there no fiduciary duty if it's automated advice? How should the SEC be thinking about that and regulating that?”   

Both the SEC and the Department of Labor are working on fiduciary rules to cover advisers, with Labor's policy expected to be finished soon, or at least sooner than the SEC's. Galvin's critique of the robo-advisory industry raises a lot of questions about how the robots should be treated under the new rules. The answers are important because automated services could stand to gather a lot more assets -- especially from less-affluent investors -- if they prove to be a cheaper and more attractive way for firms to comply with the new fiduciary regime.  

It's a tough needle for regulators to thread, and it sounds as if that may be one of the many factors explaining why these fiduciary rules are taking so long to complete. Go too easy on the robots, and run the risk of investors being exposed to the type of flaws Galvin has pointed out. Too strict, and you stand to stifle a competitive force that is undoubtedly good for consumers, who are attracted to these products because they're easy to use and usually much cheaper than the 1 percent or more of assets that human advisers typically charge.

Ultimately, it may at this point be incredibly difficult, or nearly impossible, to judge who is better -- human or machine. Most advisers don't report their average historical returns, as Jason Zweig pointed out, and even if they did that might not capture the true value of their advice.  

Automated software can -- at least in theory -- help eliminate the natural human tendency for advisers to look out for their own interests rather than those of their clients. But as Galvin's position makes clear, algorithms aren't a panacea, and the brave new world of investing has a frontier of uncertainty.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at

To contact the editor responsible for this story:
Daniel Niemi at