Robo-advisers are new in the financial marketplace. They serve investors who are comfortable investing through the Internet but still feel the need for investment guidance. Robo-advisers design online investment programs for their clients using algorithms and asset allocation models — and even manage client assets — without any human interaction with the client.

The Department of Labor has touted robo-advisers as a source of low-cost personal investment services for retirement investors that pose minimal conflicts of interest. But do they live up to the department's acclaim? A review of user agreements for the leading robo-advisers suggests they do not.

Robo-advisers do not provide personalized investment advice. Their advice is generated programmatically by computers based on client responses to online questionnaires, but the questionnaires do not elicit all relevant information and may ignore key facts, such as a user's contribution and withdrawal schedule, dependents, other sources of wealth, monthly expenses, tax situation and anticipated expenditures (such as college tuition). Robo-adviser agreements provide that the client, not the robo-adviser, is responsible for ensuring that the robo-adviser's recommendations are in the client's best interest. Clients are left on their own to assess whether recommended investments are appropriate for their needs.

The claim that robo-advisers are "free" or "low-cost" is misleading. Robo-advisers do not offer their services without compensation. In addition to any fees from the customer, they receive fees and revenue sharing from affiliated and nonaffiliated broker-dealers, custodians and clearing firms that handle the customer's securities transactions, the cost of which is embedded in the price of products sold to clients. They do not cost less than many mutual funds, particularly those that offer "C" shares.

The claim that robo-advisers "minimize conflicts of interest" also is misleading. Robo-advisers are affected with myriad conflicts of interest. They engage in self-dealing transactions, invest client assets in proprietary investment products, receive payments for order flow, use affiliated banks for cash sweeps and use affiliated brokers, custodians, clearing firms or other firms. Clients must consent to these conflicts as a condition of use.

Robo-advisers do not adhere to the high standard of care under fiduciary investment law, particularly the Uniform Prudent Investor Act. They do not evaluate an investor's total financial circumstances in light of all relevant factors and do not reasonably verify all facts relevant to a client as required by the Act. The Act requires a fiduciary to make investment decisions "not in isolation" but in the context of the portfolio "as a whole" and as a part of an overall investment strategy having risk and return objectives suited to the trust. Robo-advisers do just the opposite — they make isolated investment decisions that do not necessarily consider the investor's total portfolio. Robo-advisers also do not monitor client investments for suitability on an ongoing basis.

Robo-advisers offer their services to IRA accounts but the leading robo-advisers specifically exclude 401(k) and other accounts subject to the Employee Retirement Income Security Act. Robo-adviser agreements seek to limit the adviser's fiduciary duty and would not meet the Labor Department's proposed "best interest" contract exemption that requires investment advisers to acknowledge their fiduciary status, commit to give only advice that is in the customer's best interest, and agree to receive no more than reasonable compensation.

In May the Securities and Exchange Commission and the Financial Industry Regulatory Authority issued an investor alert cautioning that robo-advisers may give advice based on incorrect assumptions, incomplete information or circumstances not relevant to the user, and may use questionnaires that are ambiguous, misleading and programmed to generate preset options. The regulators warned that robo-advisers may use economic assumptions that will not react to market shifts, and may be programmed to consider only limited investment options — such as only investments of an affiliate. These agencies also noted that robo-advisers do not offer the benefits of human judgment and oversight or access to value-added personalized service, and cautioned users to be prepared to make their own investment decisions.

These warnings by investor protection agencies appear justified whereas the Labor Department's endorsement of robo-advisers seems curious and misplaced.

Melanie L. Fein is an attorney who advises clients on matters of banking, securities and trust law and has served on the adjunct faculty of Yale Law School. This article is adapted from her paper "Robo-Advisors: A Closer Look," which was commissioned by Federated Investors Inc.