Adviser Fiduciary Duties in the Use of Artificial Intelligence
According to lawyers from Wilson Sonsini, investment advisers who use AI should consider the unique issues the technology raises in light of the adviser’s fiduciary duty to its clients. The client alert seems timely as firms consider their tech spending and more firms like Vanguard launch robo-advisory services. The lawyers provide an overview of how AI is being used by investment advisers, including to monitor client accounts and to finetune algorithms to make trading decisions. They raise several issues advisers should consider in designing AI-based programs, to ensure they are acting in the best interests of their clients. For instance, under the adviser’s duty of loyalty to its clients the adviser’s disclosures may include a discussion of particular risks and potential conflicts raised by its use of AI, descriptions of any circumstances that might cause the adviser to override the AI-based system, and the degree of human involvement in the oversight and management of individual client accounts. The adviser’s duty of care toward its clients raise another slate of issues. “It is possible that an adviser using AI-based tools will make different assessments of what is best or appropriate for the client than if the adviser uses more traditional tools like suitability questionnaires that ask a client about her risk profile, investment objectives, and other characteristics,” the lawyers write, adding that in such a situation the adviser would be at cross-purposes with its client.” Additionally, the lawyers advise firms to develop procedures that periodically test whether their AI programs are operating correctly. The SEC in 2018 took action against a firm which, among other things, failed to disclose the risks associated with quantitative models that were found to contain errors and did not perform as intended.