The Robo Market is on the Rise

The robo-advisory market has become a globally popular tool for financial institutions, growing in prominence within the financial advice industry in particular. (KPMG).  Advances in artificial intelligence (“AI”) enable robo-advice platforms to deliver personalized investment advice tailored to individuals’ diverse needs and investment preferences. Id. Robo-advisors use algorithms to automatically construct investment portfolios tailored to an individual's goals, replacing the traditional need for a human advisor to select ideal investment options. (Molly Grace, WSJ). The growth of the robo-advisory market is driven by the increasing adoption of digital wealth management platforms and the rise in financial literacy, particularly as investors turn “towards mobile-first advisory services” that support continued market momentum. (Yahoo Finance). This article will discuss the recent growth of the robo-advisory market while focusing on the increased regulatory and legal risks that may impact financial institutions.

The robo market “is forecasted to grow to $470.91 billion in revenue in 2029 from $61.75 billion last year, marking a roughly 600% increase.” (Joice Alves, Thomson Reuters). Robo advice enables financial institutions to reach a broader demographic of people, and with the use of AI, they are able to attract a new generation of clients. (KPMG). All of the data being collected can help tailor information to each client’s specific needs, which can enhance personalization. Id. By enabling AI-driven systems to analyze patterns in consumer behavior, market trends, and individual preferences, financial institutions can generate more accurate representations for each investor. Id. Firms offering robo-advice are hoping to reduce costs by automating resource-intensive processes, resulting in more consistent outcomes. Id.

Additionally, there are different types of robo-advisors: stand-alone robo-advisors, segregated robo-advisors, integrated robo-advisors, and robo for advice. (Giovanni Cardillo, Helen Chipappini, Elsevier). “A standalone robo-advisor operates independently and manages the entire investment process internally.” Id. A segregated robo-advisor provides digital investment advice on behalf of the institution, while integrated models use the robo platform as a tool that can be accessed by multiple institutions for a fee. Id. The personal assets of an individual can also help determine what robo-advisory model is most suitable for their needs. (Wipro) These classifications illustrate how robo-advisors support human financial advisors by offering flexibility for both investors and financial institutions. (Elsevier). The FDIC explains the promises of these robo-advisors, stating: “someone would want a robo-advisor connected to a financial institution because it offers automated, low-cost investment management and personalized financial advice.” (FDIC).

Despite the potential growth, the rise of robo advisors exposes financial institutions to greater regulatory, data protection, and consumer satisfaction risks. (KPMG). In response, financial institutions offering robo-advice will likely need to establish additional controls to mitigate these risks. Id. In recent years, regulators have increasingly investigated and sanctioned financial institutions for failing to meet regulatory standards related to robo-advice. Id. One of the key regulatory standards has been adopted by the SEC and will require an “investment adviser relying on the internet adviser to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client.” (SEC). Other standards included “form ADV updates, compliance deadlines, and registration changes.” (Comply). The Consumer Protection Code (“CPC”) sets out additional requirements, on top of existing regulatory guidelines, that financial service companies must follow when providing advice to customers. (KPMG). The guidelines include proposals such as securing customers, digitalization, protecting customers, and the individual accountability framework. Id. Overall, the lack of transparency in AI models, extensive data collection, privacy concerns, and limited human interaction make financial institutions more likely to face heightened regulatory scrutiny over robo-advice. Id.

As the robo-advisory industry continues to expand, financial institutions and advisers should be aware of the additional compliance and legal risks associated with automated investment advice. (Law Crossing). Beyond the typical rules and regulations that investment advisory firms must adhere to, acting as a robo-advisor imposes an additional layer of requirements that can bring new risks. Id. Robo-advisors also have fiduciary obligations to act in the best interest of clients, and issues may arise when firms make false or misleading statements regarding the efficacy of their robo-advisory platforms. Id. In fact, the SEC charged the investment advisory firm Betterment with material misstatements and omissions. (SEC). In 2018, Betterment faced a lawsuit alleging that it misled clients by making inaccurate claims about its investment strategies’ tax efficiency. (Law Crossing). Betterment settled the case, and the SEC emphasized the importance of accurate and transparent communication with robo-advisory firms. Id. Betterment failed to provide advance notice of changes to its advisory contract, which is a violation of its fiduciary duty as an investment advisor. (SEC). The SEC’s 2025 Examination Priorities report, released annually, highlights “emerging technologies” and includes references to the ever-growing market of robo-advice. (SEC). This area continues to remain an increased focus of regulators, such as the SEC, with firms paying close attention to their disclosures, potential conflict of interest issues, and advisory practices. Id.

Overall, the growth of robo-advisors demonstrates the potential to provide personalized, efficient, and accessible investment advice. However, these platforms also create legal and regulatory risks that will require financial institutions to implement extensive compliance measures to mitigate these risks and ensure that AI advice operates within regulatory boundaries.