On Robo-Advisers: Cautionary Contract Clauses

By Majda Muhic & Qudsia Shafiq, Spring 2017 IAC Student Interns

Robo-advisers: are they really providing you with advice? Another look at your customer agreement may indicate otherwise…

Robo-advisers are no different from other product or service providers – you get what you pay for, and what you pay for is outlined in your contract. However, your relationship with your robo-adviser is different because it not only provides its service on a digital platform it’s also a service that may control a large part of your funds. Like any other big purchase, it’s important to read your contract carefully. And if it’s an electronic document, a quick search of keywords can lead you to the correct clause.

One attorney’s evaluation of robo-adviser contracts revealed several clauses that can be problematic for clients. It can be helpful to refer to your contract so you know the answer to the following questions:

  • Who is responsible for making the “right” decision?

Some contracts may shift the responsibility for making the right decision for the client to the client. Your contract may state:

  • The robo-adviser is only obligated to rely on the information that is provided by you and has no obligation to further verify that information.
  • The robo-adviser might also shift the account monitoring responsibility to the client (which can be problematic for clients who believe the robo-adviser has assumed this responsibility.)
  • The robo-adviser may state that it is the responsibility of the client to determine how appropriate the service and/or product offered by the robo-adviser for their individual needs.
  • What (if any) is the robo adviser’s fiduciary duty to you?

A closer look at your contract may reveal that your contract may minimize the robo-adviser’s fiduciary duty or limit the robo-adviser’s liability in another way:

  • The robo-adviser could disclaim a financial relationship with the client by stating that the robo-adviser is an “independent contractor” and thus, has no other relationship with the client.
  • On the other hand, the robo-adviser could claim that the only duty they have to you is a fiduciary duty and disclaim all other duties or liabilities.
  • Many robo-adviser contracts also provide that the client indemnifies the robo-adviser (along with any associated parties) from any claims, losses or damages to the client. This would mean that a client could not hold the robo-adviser responsible for any claims, losses or damages.
  • What happens if there’s a dispute?
    • Many contracts may require the client to waive any legal right to a court-ordered remedy and instead provide for mandatory arbitration of any disputes arising out of the contract or relationship

It is important to remember that these are only some of the different clauses you might find in your contract. While the contract may be a long document, it’s important to read through it carefully to determine what type of relationship you’re entering into with the robo-adviser. Like any successful relationship, both parties must understand the role they play in the relationship. Two keystrokes (simultaneously pressing Ctrl+F on Windows or pressing Command+F on Macs) can instantly search the document for a term, which can help guide you to the right section. Remember, it’s important to read the whole contract, especially definitions for any capitalized terms. This tactic will not only familiarize you with the agreement should you need to refer to it in the future, but this two-key tactic may prevent you from needing to refer to it altogether because both you and the robo-adviser know your respective roles under the agreement.

Taking a second look at your contract can save you money.