What defenses are available against robo-advisor investment loss claims?

Key defenses include: (1) documented risk questionnaire responses showing the portfolio matched user's stated risk tolerance, (2) user agreements acknowledging investment risks and potential losses, (3) regulatory compliance with SEC and state investment advisor rules, (4) algorithm transparency and disclosure documentation, and (5) evidence that recommendations were suitable based on user-provided information.

How does the fiduciary duty apply to robo-advisor defense?

Registered investment advisers have a fiduciary duty to clients. For robo-advisors, this means demonstrating that the algorithm made suitable recommendations based on user questionnaire responses, that material information was disclosed, and that conflicts of interest were managed. Defenses focus on showing the duty was met through systematic processes and disclosures.

Can robo-advisors be liable for market-driven investment losses?

Generally, robo-advisors are not liable for market losses if they recommended suitable investments based on user risk profiles and disclosed investment risks. Defenses are strongest when the platform can show the user selected their risk tolerance, acknowledged potential losses, and the algorithm performed as disclosed even during market downturns.

What documentation should robo-advisors preserve when responding to claims?

Preserve: risk questionnaire responses and scoring methodology, portfolio allocation history and rebalancing records, Form ADV and client disclosures, user agreement acceptance records, algorithm documentation and testing records, performance reporting history, all communications with the claimant, and regulatory examination correspondence.

How do risk questionnaires affect robo-advisor claim defenses?

Risk questionnaires are central to defense. They document user's stated risk tolerance, investment horizon, and financial situation. Defenses show the algorithm matched portfolios to questionnaire responses, that users could update responses, and that users were informed about the connection between their answers and investment recommendations.

What regulatory frameworks govern robo-advisor disputes?

Robo-advisors are typically regulated as investment advisers under the Investment Advisers Act of 1940 and must comply with SEC guidance specific to digital advisers. State securities laws may also apply. Key compliance areas include Form ADV disclosures, suitability requirements, fiduciary duties, and advertising rules. Demonstrating regulatory compliance strengthens defenses significantly.

Responding to Robo-Advisor Claims | Platform Defense Guide

📋 Overview

Your robo-advisor platform has received a demand letter or claim from a customer seeking compensation for investment losses, alleging unsuitable recommendations, inadequate disclosures, or breach of fiduciary duty. These claims typically arise after market downturns when customers experience portfolio losses. This guide helps platforms build effective defenses.

🛡 Risk Questionnaires

User risk questionnaire responses documenting their stated tolerance and investment objectives are your primary suitability defense.

📄 Form ADV Disclosures

Comprehensive disclosures about algorithm methodology, fees, risks, and conflicts strengthen your defense significantly.

⚖ Fiduciary Compliance

Documentation of processes ensuring recommendations are in client's best interest based on their profile.

Common Claim Types

Claim Type	Allegation	Defense Strength
Unsuitability	Portfolio didn't match risk tolerance	Strong with questionnaire
Inadequate Disclosure	Risks not properly explained	Strong with Form ADV
Algorithm Failure	Algorithm performed poorly	Strong - market risk
Breach of Fiduciary Duty	Recommendations not in best interest	Medium - depends on facts
Misrepresentation	Platform overstated expected returns	Check marketing materials

🛡 Defense Strategies

Build your defense around these key legal arguments and factual foundations.

Risk Questionnaire Documentation

Complete records of user's risk questionnaire responses, showing their stated risk tolerance, investment time horizon, financial situation, and investment objectives. The portfolio was allocated to match these user-provided inputs.

Key evidence: Timestamped questionnaire responses, risk score calculation, portfolio-to-risk-score mapping documentation.

Form ADV and Client Disclosures

Comprehensive Form ADV Parts 1, 2A, and 2B disclosing advisory services, fees, conflicts of interest, algorithm methodology, and investment risks. Records showing client received and acknowledged these disclosures.

Critical elements: Risk disclosures, no guarantee of returns, market risk warnings, fee explanations, conflict disclosures.

Suitability Process Documentation

Documentation of the platform's suitability process: how questionnaire responses are scored, how scores map to portfolios, how the algorithm ensures recommendations match client profiles, and how rebalancing maintains appropriate allocations.

Process proof: Algorithm documentation, testing records, compliance reviews, suitability determination methodology.

Market Risk Defense

Investment losses resulted from market conditions, not platform failure. The algorithm performed as disclosed; market conditions caused losses that would have affected any similar portfolio. This is inherent market risk, not negligence.

Evidence: Market data during loss period, benchmark comparisons, algorithm performance as expected.

User Agreement Provisions

Client agreement provisions acknowledging investment risks, confirming user-provided information accuracy, disclaiming guaranteed returns, and establishing arbitration requirements for disputes.

Key provisions: Risk acknowledgment, user information warranty, no performance guarantee, arbitration clause.

⚠ Marketing Material Review

Carefully review all marketing materials, particularly any statements about expected returns, algorithm performance, or risk management. Claims that could be interpreted as promising specific returns or minimizing investment risks can undermine your defense. Historical performance must include appropriate disclaimers.

📄 Key Documentation

Preserve and organize these documents to support your defense.

Client Profile Documentation

Risk questionnaire: Complete responses with timestamps
Risk score calculation: How responses generated risk score
Portfolio assignment: How risk score mapped to portfolio allocation
Profile updates: Any questionnaire re-takes or profile modifications
Client agreement: Signed/accepted agreement with disclosures

Regulatory Compliance Records

Form ADV Parts 1, 2A, and 2B (all versions)
Client delivery/acknowledgment records for disclosures
SEC registration and examination correspondence
State registration records if applicable
Compliance policies and procedures
Annual compliance reviews

Algorithm and Performance Records

Algorithm methodology documentation
Backtesting and validation records
Portfolio performance history for claimant's account
Rebalancing records and triggers
Benchmark comparison data

💡 Books and Records Requirements

SEC Rule 204-2 requires investment advisers to maintain extensive records. Ensure you're preserving all required records, including client communications, recommendations, and the basis for suitability determinations. These records are central to your defense.

📝 Sample Response Letter

Platform Response to Robo-Advisor Claim

Re: Response to Demand Regarding Investment Account [ACCOUNT NUMBER] Dear [CLAIMANT NAME/COUNSEL]: We have received your demand letter dated [DATE] regarding your client's investment account and alleged losses of approximately $[AMOUNT]. After careful review, we respectfully deny the claims set forth in your letter. SUITABILITY AND RISK PROFILE Your client completed our risk questionnaire on [DATE], providing the following information: - Risk tolerance: [MODERATE/AGGRESSIVE/ETC.] - Investment horizon: [X YEARS] - Investment objective: [GROWTH/INCOME/ETC.] Based on these responses, your client received a risk score of [X] and was assigned to our [PORTFOLIO NAME] portfolio, which is designed for investors with similar risk profiles. This portfolio allocation was suitable for your client's stated objectives and risk tolerance. DISCLOSURES AND ACKNOWLEDGMENTS Your client received and acknowledged our Form ADV Part 2A on [DATE], which disclosed: - Investment risks, including potential loss of principal - That past performance does not guarantee future results - Our algorithm methodology and limitations - All material conflicts of interest - Fee structure and expenses Your client's advisory agreement, executed on [DATE], included explicit acknowledgment of investment risks and confirmation that the information provided in the questionnaire was accurate. MARKET CONDITIONS The losses your client experienced occurred during [DESCRIBE MARKET CONDITIONS - e.g., "the Q4 2022 market downturn affecting equity and bond markets broadly"]. Our algorithm performed as disclosed; these losses reflect inherent market risk that was disclosed to your client, not any deficiency in our advisory services. Your client's portfolio [performed in line with / outperformed] the relevant benchmark during this period, demonstrating the algorithm functioned appropriately. FIDUCIARY DUTY COMPLIANCE As a registered investment adviser, we owe fiduciary duties to our clients. We fulfilled these duties by: - Gathering comprehensive information about your client's situation - Making suitable portfolio recommendations based on that information - Providing full disclosure of material information - Monitoring and rebalancing the portfolio appropriately ARBITRATION PROVISION Pursuant to Section [X] of the Advisory Agreement, disputes must be resolved through binding arbitration. If your client wishes to pursue this matter, we demand arbitration before [AAA/FINRA/JAMS]. We reserve all rights and defenses. This letter is for settlement purposes only under FRE 408. Sincerely, [PLATFORM NAME] [CHIEF COMPLIANCE OFFICER / AUTHORIZED REPRESENTATIVE]

🔗 Related: Investment Dispute Resources

Understanding investor claim strategies can help you prepare stronger defenses.

View Investment Recovery Demand Letter Guide →

💰 Pricing

Professional legal assistance for responding to robo-advisor claims.

Legal Services

📄 Demand letter: Flat fee $450
⏳ Extended negotiation: $240/hr
📊 Contingency: 33-40% for strong claims

Initial response letters include review of your Form ADV, client agreements, risk questionnaires, and compliance documentation, plus a customized response letter. Extended negotiation, arbitration defense, and regulatory matters billed hourly.

🚀 Next Steps

Day 1: Preserve

Pull and preserve client's complete file: questionnaires, agreements, disclosures, communications, and account history.

Day 1-3: Review

Analyze suitability documentation and identify any gaps in disclosures or process.

Week 1: Respond

Send initial response letter establishing suitability defense and asserting arbitration rights.

Week 2+: Defend

If claimant proceeds, prepare for arbitration with full suitability and compliance documentation.

Protect Your Platform

Get professional help defending against robo-advisor claims.

Schedule Consultation - $450

Resources

SEC: Investment adviser guidance and robo-adviser compliance
FINRA: Suitability rules and arbitration procedures
State regulators: Investment adviser registration requirements
AAA/JAMS: Arbitration providers for dispute resolution