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Human advisors vs. robo-advisors: Will ethics trump compliance?

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For decades, advisors have violated regulations and laws in order to make more money. Insurance and securities firms now spend hundreds of millions of dollars on producer recruitment, selection, training and compliance oversight. Yet the violations keep coming, and clients, especially seniors, keep getting hurt. The obvious takeaway: Humans are morally fragile and nothing will change unless we eliminate the human element.

See also: 12 worst financial advisors in America

Eliminating the human element is not a fanciful notion. In fact, it’s happening now with the so-called robo-advisors. Firms such as Wealthfront, Betterment, and FutureAdvisor provide Internet-based investment services. They tout simplicity, convenience, low cost and tax-efficiency, powered by the latest in technology and Modern Portfolio Theory. The public has responded favorably, investing more than $2 billion in recent years.

Although robo-advisors excel at marketing, they’re even stronger at compliance. Since computers standardize procedures, content and interactions, they effectively banish promissory lanaguage, unapproved sales techniques and materials, and misrepresentation (assuming, of course, that robo-advisor investment experts and software engineers aren’t Madoffs in disguise!).

What’s more, the robo-advisors face no artificial contraints of time or money, meaning they can not only fulfill the letter of the Investment Advisors Act (providing Form ADV Parts 1 and 2, among other things), they can transcend it by providing more robust disclosures and investor-education content. WealthFront is a perfect case in point.

Established in 2008, the company currently has $1.8 billion in assets under management. Its website balances marketing impact with compliance focus. Consider its home-page performance chart, which illustrates a 4.6 percent estimated additional annual return from the company’s investment approach over the returns produced by the average 20-year U.S. mutual fund. The company then explains where that 4.6 percent comes from, defining its methodology in simple, though rich, detail. For a tech-savvy, DIY investor, the chart is a huge trust builder.

Similarly, Wealthfront offers a helpful investment strategy white paper, as well as robust “Who We Are” and “FAQ” website sections. Everything is clearly and simply written and easily accessible on their website. Transparency grade: A+.

Clearly, fee disclosures are a strong suit of the robo-advisors. For example, Betterment, which claims to be the largest player in the field, has created a fee-disclosure slider that graphically illustrates how costs decline from 0.35 percent of assets for account balances under $10,000, to 0.15 percent for those with a minimum balance of $100,000. This chart takes all the mystery out of fees, again building good will and consumer confidence.

But here’s the rub: While robo-advisors may be great at compliance and transparency, they may fall short regarding ethics. Why? Because ethics is the domain of thought that defines the right way to act (or invest). Since automated investment platforms don’t provide real-time guidance to investors on their investing (or spending) decisions, they may lack the true ethical judgment of human beings.

For example, a robo-advisor is ill-equipped to encourage clients to forego investing online until they augment their emergency fund, reduce credit-card balances, or set up a college saving 529 account. And they lack the ability to keep clients accountable by sticking with budgets and other financial commitments.

In short, if robo-advisors keep growing, we might see fewer compliance violations (and victimized seniors) and larger retirement balances due to the inherent robo-advisor efficiencies. Definitely a good thing for the industry and the public. But I believe ethics (as embodied in human advisors) will ultimately trump compliance (robo-advisors) because consumers will still need someone who can listen, give cutomized advice, and talk them off the ledge when the next market crash hits. 


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