Perhaps a decade or so ago, I started to notice that most securities firms were encouraging their brokers to begin placing clients’ accounts on “automatic pilot”.  They sold investors on the benefits of having their money managed by a Team of (unknown) “Experts” at the home office, and then they wouldn’t have to get involved with that messy “investment stuff”. The broker would help the client answer a few questions; and based on those responses, he or she would help the client choose from among a number of investment strategies, and then, the client was supposed to just sit back and watch their portfolios grow.  HA!  Oh, and the broker then went on to the next sale!

More recently, “Wall Street” has taken this “Profit Strategy”–for them, that is–to an even “higher” level.  Auto-pilot has morphed into “robo-pilot”.  The securities industry is now trying to transform many accounts, perhaps mostly of the masses, into ones that will be served by a computer-directed (“algorithm” is the proper word) investment program, either by internal teams or, in some cases, directed (not really managed) through an outside vendor firm.  The linked column, by Janet Kidd Stewart, in the Chicago Tribune, is as follows: http://www.chicagotribune.com/business/yourmoney/sc-cons-0521-journey-20150518-column.html.  Annual fees might run around 1.5% on the total investible assets.

During my days as a financial advisor, when I met with new clients, they were often quiet, hesitant and acted like they were entering a dentist office, perhaps expecting a root canal.  I found that a little conversation helped:  do they have children; where they are from; occupation; etc?  Oftentimes, finding commonalities between us and discussing their goals (i.e. education, retirement plans, etc.) enabled them to loosen-up and be more explicit as to what they actually wanted their investments to do for them.  With regard to robo-advisors, however, after the initial questionnaire, there might not be much chance for a true give-and-take.  Just like at the deli line in the supermarket!

The U.S. Securities and Exchange Commission’s “Office of Education and Advocacy” and the Financial Industry (Self) Regulatory Authority issued a joint alert to provide investors with a general overview of automated investment tools.  The Alert, dated August 8, 2015, is linked as follows: http://www.sec.gov/oiea/investor-alerts-bulletins/autolistingtoolshtm.html.  As I see it, such impersonal automated products will probably just offer a version of the old GIGO” (garbage in, garbage out) concept.

Several questions that immediately come to mind are:

1. Should the future value of someone’s life savings be determined by an on-line questionnaire, where the new client might not have understood the questions, and the person inputting the responses (into the computer) might not have understood the answers?  Hardly!
2. What about a young family that has several investment goals, say for a 13 year old’s college fund, that of a 7 year old and the parent’s retirement in 30 years?  Will the computer suggest splitting the account–and the money to be invested–into three smaller, less-profitable accounts in order to accommodate the various investment time-frames and, perhaps, risk-tolerances?
3. What is the process involved in reviewing the client’s account(s) when they make additional large cash additions, their personal situation changes or they just wish to review where they are and discuss any investments that they might have?  Is that encouraged, or maybe just not actively offered?
4. Given the fact that the fees are similar to what are generally charged when you work with an “Investment Advisor” (a real Fiduciary), will the firm have to convert all computer-managed accounts to fiduciary ones?  If so, how will they give actual “advice”, if their is no specific person, with the appropriate FINRA (“RIA”) license to act on the firm’s behalf?  Also, in a serious market downturn, like in 2008, do you really want to deal with a stranger?
5. Are you comfortable in providing detailed personal information, such as: name(s); address; date(s) of birth; Social Security Number(s); Annual Income; Net Worth (assets, less liabilities); place(s) of employment; etc. to the investment firm and, perhaps, to an outside vendor?

There are many, many questions that will come up.  First and foremost, it is important to consider that when a person walks into a bank, brokerage firm or insurance agency, they generally believe that that company–and the individual that they meet with–will have their best interest at heart–and really know what they are doing.  Rather than provide more client-broker contact, education and properly managing client’s investment assets, Robo-Investing just enables investment firms to move even further in the opposite direction.

NOTE: Much of what goes on in the Financial Services Industry is copied by other banks on both sides of “The Pond”.  So, although I am writing about what is happening in the U.S., some variations, no doubt, are being rolled-out in Europe, as well.


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