The market for working with robo-advisers is growing rapidly.
As with anything that increases in popularity, there is new research available about these seemingly “neutral” programs.
Before I share it, let’s define a robo-“advisor”.
Robo–advisors are a class of financial adviser that provide financial advice or portfolio management online with minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms. (Wikipedia)
In other words, this is nothing more than computer- based programs into which certain data is fed about the investor. Then, the computer applies algorithms to the data and spits out an allocated investment program.
Here in lies the potential problem.
The people who create the algorithms can intentionally or unintentionally slip in certain biases which impact the output. For example, the output can be subtly slanted to favor the products of the sponsoring firm.
A recent academic paper highlighted in Investment News June 30, 2017 states the following:
“It would be naïve to assume that intermediaries will always choose the algorithms and architecture that are best for consumers, rather than those that are best for the intermediaries.”
This leads us to the crux of the issue:
Securities industry regulators are already stretched with current workloads to examine human advisers. Now, to be sure that the programs are indeed written “in the best interest of the consumer,” they must also learn new techniques and skills to examine robo-advisors.
While robo-advising is here to stay, it is important to understand that there is much to develop to create adequate review and supervision.
In the meantime, if you prefer an adviser with whom you can meet and connect with personally, we are here for you.
Barbara A. Culver
CFP®, ChFC®, CLU, AEP®