Robo-advisors manage billions in investor assets through automated algorithms, but when these systems fail, investors face significant losses with limited recourse. If you’ve suffered financial harm from a robo-advisor platform like Betterment, Wealthfront, or Schwab Intelligent Portfolios, you may have legal grounds to recover your losses. As a securities attorney with 10 years of experience defending broker-dealers, I understand how automated trading systems work and where they fail investors.
The global robo-advisory market reached $1.1 trillion in 2023 and is projected to grow to $3.3 trillion by 2032, according to market research from GlobeNewswire. As these platforms expand, so do legal disputes over algorithm failures, unsuitable recommendations, and misleading AI claims. This page explains when you can sue a robo-advisor, the legal process through FINRA arbitration, and how our firm can help you pursue compensation.
Key Takeaways
- Robo-advisors are registered investment advisers subject to fiduciary duties under federal securities law
- Common claims include algorithm failures, unsuitable recommendations, breach of fiduciary duty, and false AI claims
- The SEC brought its first “AI washing” enforcement actions against investment advisers in March 2024
- Most robo-advisor disputes are resolved through FINRA arbitration, not court litigation
- You have six years from the date of loss to file a FINRA arbitration claim
- Customer win rates in FINRA arbitration were 30% in 2025, with 60-70% of cases settling before hearing
What Are Robo-Advisors?
Robo-advisors are digital platforms that provide automated investment management services with minimal human interaction. These platforms use computer algorithms to construct and manage investment portfolios based on information you provide about your financial situation, risk tolerance, and investment goals.
Major robo-advisor platforms include Betterment, Wealthfront, Schwab Intelligent Portfolios, Fidelity Go, and Vanguard Digital Advisor. These services typically charge lower fees than traditional financial advisors, making investment management accessible to investors with smaller account balances.
Despite the automated nature of these services, robo-advisors are registered investment advisers with the Securities and Exchange Commission (SEC) and remain subject to the same fiduciary obligations as human advisors. According to SEC guidance issued in February 2017, robo-advisers must make full and fair disclosure of all material facts to clients and employ reasonable care to avoid misleading clients.
The automated nature of robo-advisors creates unique legal issues. When an algorithm makes unsuitable recommendations, fails to adjust to changing market conditions, or contains programming errors that cause losses, determining liability becomes complex. These platforms operate under the legal fiction that software can fulfill fiduciary duties traditionally performed by human judgment.
When Can You Sue a Robo-Advisor?
Not every investment loss creates legal liability. Markets fluctuate, and even well-managed portfolios experience downturns. However, you may have grounds for a lawsuit or FINRA arbitration claim when losses result from the robo-advisor’s failure to meet its legal obligations.
Valid legal claims against robo-advisors typically involve one or more of these elements:
Breach of Fiduciary Duty
Robo-advisors owe you a duty of care and duty of loyalty. The duty of care requires them to provide advice in your best interest, seek best execution of transactions, and provide ongoing monitoring. The duty of loyalty requires them to disclose conflicts of interest and prioritize your interests over their own profits.
Algorithm Failures
When flawed algorithms generate unsuitable recommendations, fail to rebalance portfolios appropriately, or make decisions inconsistent with your stated risk tolerance, the firm may be liable for resulting losses. This includes failures to adjust to market conditions or programming errors that execute unintended trades.
Negligence and Inadequate Supervision
Robo-advisor firms must maintain reasonable supervision and control over their automated systems. According to FINRA Rule 3110, firms using algorithmic strategies must implement reasonable controls. Technical failures, inadequate testing, or lack of human oversight can constitute negligence.
Misrepresentations and “AI Washing”
If a robo-advisor made false claims about its AI capabilities, investment strategy, or past performance that induced you to invest, you may have a fraud claim. The SEC has made enforcement of these “AI washing” violations a priority in 2024-2025.
To succeed in a robo-advisor lawsuit, you must prove that the adviser owed you a duty, breached that duty through misconduct or negligence, and directly caused measurable financial losses. Documentation of the firm’s representations, your account activity, and the specific failures that caused losses is essential.
Types of Robo-Advisor Legal Claims
Robo-advisor litigation encompasses several distinct types of claims, each with specific legal elements and proof requirements:
| Claim Type | Legal Basis | Common Fact Patterns |
|---|---|---|
| Breach of Fiduciary Duty | Investment Advisers Act of 1940; SEC Rule 206(4) | Unsuitable investment recommendations; failure to disclose conflicts of interest; prioritizing firm profits over client interests |
| Negligence | Common law duty of care; FINRA Rule 3110 | Algorithm errors causing unintended trades; inadequate portfolio monitoring; failure to implement proper supervision and controls |
| Suitability Violations | FINRA Rule 2111; SEC guidance | Recommending investments inconsistent with stated risk tolerance; failure to gather adequate customer information; overly aggressive allocations |
| Fraud and Misrepresentation | Securities Exchange Act Section 10(b); SEC Rule 10b-5 | False claims about AI capabilities; misleading performance data; failure to disclose material facts about investment strategy |
| Failure to Execute | Duty of best execution; contractual obligations | Technical glitches preventing trades; system failures during market volatility; inability to access account during critical periods |
Algorithm Negligence and Technical Failures
One of the most common robo-advisor claims involves algorithm failures that cause financial harm. These may include programming errors that execute unintended trades, rebalancing algorithms that fail during market volatility, or systems that don’t adjust to changing client circumstances.
Under FINRA rules, firms must test algorithmic strategies before deployment and maintain ongoing oversight. When robo-advisors skip adequate testing or fail to monitor system performance, resulting losses may constitute negligence.
Technical failures present another area of liability. If a platform experiences system outages that prevent you from accessing your account or executing time-sensitive transactions, the firm may be liable for resulting losses. According to research on algorithmic accountability in financial advising, regulators increasingly focus on whether firms implement adequate controls to prevent and respond to technical failures.
Unsuitable Investment Recommendations
Robo-advisors gather information about your investment objectives, time horizon, risk tolerance, and financial situation through online questionnaires. They use this data to generate investment recommendations. When the algorithm recommends investments that don’t match your profile, the firm may have violated suitability requirements.
Common suitability violations include allocating a risk-averse retiree into aggressive growth stocks, recommending illiquid investments to someone needing access to funds, or failing to account for your existing holdings and overall financial picture. The automated nature of robo-advisors doesn’t excuse suitability failures.
Breach of Fiduciary Duty Claims
As registered investment advisers, robo-advisor firms owe you fiduciary duties of care and loyalty. The SEC’s 2019 fiduciary interpretation clarifies that these duties apply equally to automated and human advisers.
The duty of care requires the robo-advisor to provide advice in your best interest, seek best execution when effecting transactions, and provide monitoring over the agreed scope of the relationship. The duty of loyalty requires disclosure of conflicts of interest and prioritizing your interests over the firm’s profits.
Breach of fiduciary duty claims might arise when a robo-advisor recommends proprietary investment products because they generate higher fees for the firm, fails to disclose payment-for-order-flow arrangements, or doesn’t adequately monitor your account for changing circumstances. Learn more about investment fraud and how it applies to automated advisors.
“AI Washing” and False Advertising Claims
In March 2024, the SEC brought its first enforcement actions against investment advisers for making false statements about their use of artificial intelligence, a practice regulators call “AI washing.” According to the SEC’s press release, two firms faced penalties totaling $400,000 for misleading claims about their AI capabilities.
The SEC charged Delphia (USA) Inc. with claiming to be the “first investment adviser to convert personal data into renewable source of investable capital” and stating it used machine learning to analyze member data, when in fact these claims were materially misleading. Global Predictions Inc. falsely claimed to be the “first regulated AI financial advisor” and misrepresented its use of AI-driven forecasts.
AI washing represents a growing enforcement priority. At the Securities Enforcement Forum West in May 2025, senior SEC officials reiterated that rooting out fraud schemes related to AI washing remains an immediate priority, according to regulatory analysis from the New York State Bar Association.
If you invested with a robo-advisor based on false or exaggerated claims about its AI capabilities, machine learning sophistication, or algorithmic advantages, you may have grounds for a fraud claim seeking recovery of your losses.
The Legal Framework: How Robo-Advisors Are Regulated
Understanding the regulatory framework governing robo-advisors helps evaluate potential legal claims. These platforms operate under multiple layers of federal securities regulation.
Investment Advisers Act of 1940
Robo-advisors are registered investment advisers subject to the Investment Advisers Act of 1940. This law imposes fiduciary duties and requires advisers to register with the SEC, maintain books and records, and adopt compliance programs designed to prevent violations.
The Act’s antifraud provisions prohibit any device, scheme, or artifice to defraud clients, and any act, practice, or course of business that operates as fraud or deceit. These provisions apply regardless of whether advice is delivered by humans or algorithms.
SEC Guidance on Robo-Advisors
In February 2017, the SEC’s Division of Investment Management issued specific guidance for robo-advisors addressing three key areas: disclosures, suitability, and compliance programs. The guidance emphasizes that automated delivery of investment advice doesn’t change the fundamental obligations advisers owe to clients.
The SEC requires robo-advisors to provide clear disclosures about their services, limitations, conflicts of interest, and fees. The disclosures must be written in plain English and presented in a format accessible to retail investors. Many robo-advisor disputes arise from inadequate or misleading disclosures that create false expectations about service quality, investment strategies, or risk management.
FINRA Supervision Requirements
Although robo-advisors are investment advisers, many also operate through affiliated broker-dealers subject to FINRA Rule 3110, which requires reasonable supervision of associated persons and business activities.
For algorithmic trading strategies, FINRA recommends firms establish supervision and control programs covering risk assessment, software development, system testing, trading systems review, and compliance communication. FINRA’s Regulatory Notice 15-09 provides detailed guidance on supervising algorithmic strategies.
When robo-advisors fail to implement adequate supervision and control systems, resulting losses may support negligence claims.
The FINRA Arbitration Process for Robo-Advisor Disputes
Most robo-advisor disputes are resolved through FINRA arbitration rather than court litigation. If you opened an account with a robo-advisor, you likely agreed to a mandatory arbitration clause requiring disputes to be heard by FINRA arbitrators rather than judges or juries.
FINRA arbitration offers several advantages over court litigation: cases typically resolve faster (averaging 12-14 months), the process is less formal, and arbitrators often have securities industry expertise. However, arbitration also limits discovery, appeals are extremely difficult, and the process may favor repeat industry players.
FINRA Arbitration Statistics and Trends
Understanding recent FINRA arbitration data helps set realistic expectations for robo-advisor claims. According to FINRA’s 2024 dispute resolution statistics:
| Metric | 2024 Data | 2025 Trend |
|---|---|---|
| Total Case Filings | 2,469 cases | Similar levels expected |
| Customer Cases | 62-65% of filings | Consistent proportion |
| Settlement Rate | 60-70% of cases | Stable |
| Customer Win Rate at Hearing | 26% (2024) | 30% (2025) |
| Average Case Duration | 12.5 months | 13.6 months (2025) |
| Cases to Hearing Duration | N/A | 15.5 months average |
Notably, customer win rates improved to 30% in 2025 from 26% in 2024.
The majority of FINRA arbitration cases settle before reaching a hearing. Settlement rates of 60-70% indicate that most disputes resolve through negotiation or mediation. This often occurs after initial discovery reveals strengths or weaknesses in either party’s case.
Steps in a FINRA Arbitration Claim
Filing a FINRA arbitration claim against a robo-advisor follows a structured process:
1. File Statement of Claim
You file a statement of claim with FINRA describing your allegations, the legal basis for your claims, and the damages you seek. You must pay filing fees based on the amount of your claim.
2. Respondent Answer
The robo-advisor firm files an answer responding to your allegations and raising any defenses. This typically occurs within 45 days of receiving your claim.
3. Arbitrator Selection
Both parties participate in selecting a panel of arbitrators (typically three for larger claims, one for smaller claims) from FINRA’s roster. Arbitrators may include industry representatives and public arbitrators.
4. Discovery
Both sides exchange relevant documents and information. FINRA’s discovery rules are more limited than federal court discovery, focusing on documents most relevant to the claims and defenses.
5. Pre-Hearing Motions
Parties may file motions to dismiss claims, compel document production, or resolve procedural issues. Motions to dismiss are less common in arbitration than in court litigation.
6. Hearing
If the case doesn’t settle, it proceeds to a hearing where both sides present evidence, examine witnesses, and make legal arguments. Hearings follow a less formal format than trials.
7. Award
The arbitration panel issues a written award stating whether you prevailed and the amount of damages, if any. Awards are binding and enforceable in court, with very limited appeal rights.
8. Settlement Negotiation
Settlement discussions may occur at any point during the process. Many cases settle after discovery reveals key facts, before the expense and uncertainty of a hearing.
9. Mediation Option
FINRA offers mediation services where a neutral mediator helps parties negotiate a settlement. Mediation is voluntary but often successful in resolving disputes efficiently.
Time Limits for Filing FINRA Claims
FINRA’s eligibility rules allow arbitration claims to be filed within six years of the occurrence or event giving rise to the claim. This six-year period typically runs from when you suffered the loss or discovered (or reasonably should have discovered) the wrongdoing.
For robo-advisor claims, the limitations period may begin when the algorithm made unsuitable recommendations, when you discovered losses in your account, or when you learned about false AI claims that induced your investment. The specific facts determine when the clock starts running.
Acting promptly protects your rights. Evidence may be lost, witnesses’ memories fade, and firms are only required to maintain certain records for specific periods. If you believe you have a claim, consult with a securities attorney soon after discovering the problem.
Proving Your Robo-Advisor Claim: What Evidence Do You Need?
Successful robo-advisor claims require comprehensive documentation demonstrating the firm’s wrongdoing and your resulting losses. The strength of your evidence often determines whether your case settles favorably or proceeds to hearing.
Account Documentation
- Account opening documents and agreements
- Initial questionnaires about investment objectives and risk tolerance
- All account statements showing holdings and values
- Trade confirmations for all transactions
- Performance reports and portfolio reviews
- Correspondence with customer service
Marketing and Representations
- Website content, advertisements, and promotional materials
- Claims about AI capabilities or algorithmic strategies
- Performance data or projections that influenced your decision
- Email communications from the firm
- Social media posts or blog content
- Form ADV disclosures filed with the SEC
Evidence of Losses
- Documentation of account value at opening and at relevant points
- Calculations showing losses attributable to unsuitable recommendations
- Comparison to appropriate benchmarks
- Evidence linking specific algorithm decisions to losses
- Expert analysis of portfolio suitability
- Tax documents showing realized losses
Technical Failures
- Screenshots of error messages or system outages
- Records of customer service complaints
- Documentation of inability to access account
- Evidence of missed trading opportunities due to platform failures
- Logs showing algorithm malfunctions
- Communications acknowledging technical problems
In robo-advisor cases, expert testimony often proves essential. You may need a financial expert to analyze whether the investment recommendations were suitable given your profile, a damages expert to calculate your losses, and potentially a technology expert to explain algorithm failures or programming errors.
The robo-advisor firm will defend by arguing that your losses resulted from normal market risk rather than wrongdoing, that you provided inaccurate information in your questionnaires, that you were sophisticated enough to understand the risks, or that you failed to monitor your account or update your profile when circumstances changed.
What Compensation Can You Recover?
Successful robo-advisor claims may result in several types of compensation, depending on the nature of your losses and the legal theories you pursue:
- Actual Losses: The most common form of damages compensates you for the decline in your account value attributable to the robo-advisor’s misconduct. This typically compares your actual account value to what it would have been if proper advice had been given or if your funds had been invested in appropriate alternatives.
- Lost Opportunity Costs: You may recover damages for investment opportunities you missed because your funds were tied up in unsuitable investments recommended by the robo-advisor.
- Interest: FINRA arbitrators may award interest on your losses from the date of the wrongful conduct through the date of the award, recognizing the time value of money.
- Attorneys’ Fees and Costs: In some cases, you may recover your legal expenses, though this depends on your agreement with the firm and applicable law. Many robo-advisor agreements specify whether fee-shifting is available.
- Punitive Damages: In rare cases involving egregious misconduct, fraud, or willful violations, arbitrators may award punitive damages designed to punish the wrongdoer and deter similar conduct. These are uncommon in arbitration.
The amount you can recover depends on proving both liability and damages. You must demonstrate not only that the robo-advisor breached its duties but also that this breach directly caused quantifiable financial harm. Expert analysis often proves necessary to establish the causal link and calculate damages.
Why Choose Varnavides Law for Your Robo-Advisor Claim?
Robo-advisor litigation requires understanding both securities law and technology systems. As a securities attorney who spent 10 years defending broker-dealers at a major law firm, I bring an insider’s perspective to representing investors harmed by automated trading platforms.
Insider Knowledge of Automated Systems
My decade defending broker-dealers included work on algorithmic trading issues, compliance with FINRA supervision rules, and defense of suitability claims. This experience provides insight into how robo-advisor firms structure their systems, where common failures occur, and how firms defend against investor claims.
Understanding the defense playbook allows me to anticipate counterarguments, gather evidence that withstands scrutiny, and present claims in ways that resonate with arbitrators who understand securities industry practices.
Focus on Emerging Technology Fraud
Robo-advisor litigation represents an emerging area of securities law where legal standards continue developing. My practice focuses on cases involving AI, automated trading, and algorithmic investment advice, where the law applies traditional fiduciary principles to new technologies.
The SEC’s recent AI washing enforcement actions signal increased regulatory attention to how investment advisers market and deploy artificial intelligence. I stay current with these developments to pursue claims based on the latest regulatory guidance and enforcement priorities.
FINRA Arbitration Experience
I have extensive experience representing investors in FINRA arbitration, where most robo-advisor disputes are resolved. The arbitration process differs significantly from court litigation, with distinct procedural rules, discovery limitations, and strategic considerations.
Success in FINRA arbitration requires understanding what evidence arbitrators find persuasive, how to present technical concepts clearly, and when to pursue settlement versus proceeding to hearing. My track record includes favorable results for investors facing the resource advantages of large financial institutions.
Fee Structure
We handle most robo-advisor lawsuit cases on a contingency fee basis, which means you pay no upfront attorney fees. We only get paid if we recover money for you through settlement or arbitration award.
Under a contingency arrangement, our fee is a percentage of the recovery, with the specific percentage discussed during your free consultation. This aligns our interests with yours and makes legal representation accessible even if you can’t afford to pay hourly fees during the case.
You remain responsible for case costs, which may include FINRA arbitration filing fees, expert witness fees, deposition transcripts, and document production expenses. We can discuss cost estimates and payment arrangements during your consultation.
Every case is different, and fee arrangements depend on the specific circumstances of your claim. Schedule a free consultation to discuss your case and fee arrangement.
Frequently Asked Questions About Robo-Advisor Lawsuits
Can I sue a robo-advisor for investment losses?
Yes, if your losses resulted from the robo-advisor’s breach of fiduciary duty, negligence, unsuitable recommendations, or fraud. Normal market losses alone don’t create liability, but when a robo-advisor fails to meet its legal obligations and causes harm, you have grounds for a claim. Most robo-advisor claims are pursued through FINRA arbitration rather than court litigation due to mandatory arbitration clauses in customer agreements.
What is “AI washing” and can I sue for it?
AI washing refers to false or misleading claims about a firm’s use of artificial intelligence. If a robo-advisor made exaggerated claims about its AI capabilities, machine learning sophistication, or algorithmic advantages that induced you to invest, and those claims were materially false, you may have a fraud claim. The SEC brought its first AI washing enforcement actions against investment advisers in March 2024, signaling this is a priority area for enforcement.
How long do I have to file a claim against a robo-advisor?
FINRA arbitration claims must be filed within six years of the occurrence or event giving rise to the claim. This typically runs from when you suffered the loss or discovered the wrongdoing. Federal court claims under Section 10(b) of the Securities Exchange Act have a shorter two-year statute of limitations. Acting promptly preserves evidence and protects your rights.
What damages can I recover in a robo-advisor lawsuit?
You may recover actual losses (the decline in your account value attributable to misconduct), lost opportunity costs, interest from the date of wrongful conduct, and potentially attorneys’ fees and costs depending on your agreement and applicable law. In rare cases involving egregious conduct, punitive damages may be available. The amount depends on proving both that the robo-advisor breached its duties and that this breach directly caused quantifiable harm.
Do robo-advisors have fiduciary duties like human financial advisors?
Yes, robo-advisors are registered investment advisers subject to the same fiduciary duties as human advisors under the Investment Advisers Act of 1940. They owe you duties of care and loyalty, must provide advice in your best interest, seek best execution of transactions, disclose conflicts of interest, and provide appropriate monitoring. The automated nature of their services doesn’t excuse them from these obligations.
What evidence do I need to prove a robo-advisor claim?
Key evidence includes your account opening documents, questionnaires about your investment objectives and risk tolerance, all account statements and trade confirmations, marketing materials and AI claims that influenced your decision, correspondence with the firm, and documentation of losses. In many cases, expert testimony is necessary to prove that recommendations were unsuitable, that algorithm failures occurred, or to calculate damages.
How long does a FINRA arbitration case take?
According to FINRA statistics, the average case duration in 2024 was 12.5 months, with 2025 cases averaging 13.6 months. Cases that proceed to hearing typically take about 15.5 months. However, 60-70% of cases settle before reaching a hearing, often resolving more quickly. The specific timeline depends on case complexity, discovery disputes, and arbitrator availability.
What is the success rate for investors in FINRA arbitration?
Customer win rates in FINRA arbitration were 30% in 2025, up from 26% in 2024. However, this only reflects cases that proceed to a final hearing. The majority of cases (60-70%) settle before hearing, often on terms favorable to investors.
Take Action: Free Consultation for Robo-Advisor Losses
If you’ve suffered losses through Betterment, Wealthfront, Schwab Intelligent Portfolios, or another robo-advisor platform, you may have legal options to recover your losses. Time limits apply to securities claims, and evidence may be lost if you delay.
Contact Varnavides Law to schedule a free consultation. I will review your account documents, evaluate the strength of your potential claims, explain your legal options, and provide honest guidance about whether pursuing a claim makes sense in your situation.
Schedule Your Free Consultation
Contact us today to discuss your robo-advisor losses with an experienced securities attorney. We represent investors nationwide in FINRA arbitration claims against automated investment platforms.
