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.
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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.