Who or what are you using to help make your investing decisions…a human or computer program? Mark Andress and Troy Hooper point out in Forbes that sophisticated financial advice used to be just for the wealthy. But in the last couple of years, “robo advisors” – which use computer programs to make intelligent investing decisions – have emerged, threatening to open up the market to the masses.
Until now, these robo advisors have been more of a novelty than a mainstay, with advisors of the flesh-and-blood variety overwhelmingly in command. But this year is expected to be a turning point for the rise of the robo advisor, particularly if a new Department of Labor rule comes into effect.
Under the rule change, anyone who gives out retirement investment advice and gets paid for it would now become a fiduciary, meaning they would have to put their clients’ best interests before their own profits. Robo advisors are already regarded as fiduciaries because they use computer algorithms to make investment decisions automatically.
Many robo advisors will license their platforms to the big banks and traditional wealth managers, enabling them to be compliant with the new rule. Goldman Sachs, JP Morgan, Merrill Lynch and Morgan Stanley could find value in purchasing a robo advisory service and pairing it with their network of in-the-flesh experts. Wells Fargo has also reportedly looked into buying a robo advisor.
Today, there are 22 robo advisors, but Tiburon Strategic Advisors believes that number will consolidate to 10 by 2019. Until now, they accounted for just a fraction of the overall wealth management space. But they are expected to gather $78.6 billion in assets under management in 2019, up from $7.2 billion in 2015. By 2019, robo advisors will serve 1.1. million clients, more than triple the 300,000 people served by the online-only advisors today.
While banks and wealth managers may look at robo advisors as a buying opportunity, robo advisors do have some critics. In InvestmentNews, David Zolt explains that the term “robo advisor” is not accurate, because there is no advising taking place. Robo-investing is the correct term.
David John Marotta of Marotta Wealth Management shares that automatic investing and rebalancing tools don’t provide any advising services. Even with such limited factors, there are significant problems with the help given by robo-investing that potential users may not realize. For example, the review he and his colleagues did of Schwab Intelligent Portfolios found that they were not very intelligent. They also found that Schwab’s rebalancing algorithm has more faults than virtues. Marotta and his colleagues believe that computers can do better than the current capabilities of robo-investing, and competent advisors who know their clients and use computer technology can do even better.
Marotta further argues that a program is only as good as its programmer. Therefore, robo-investing programs produced by commission-based brokerage firms will automatically make all the same mistakes the firms’ human agents do. They will not act in clients’ best interests simply because they are executing a program.
Robo advisors are going to have a presence in the coming years. The question to consider is…will you be one of the people who supports it happening?
(Photo: Robot, Flickr)