(Bloomberg Business) — You’re sitting down with your financial advisor and looking her right in the eye. Is she advising you? Or selling you?
Some financial advisors, like doctors and lawyers, have a legal duty to put their clients’ interests’ first. Others are free to sell expensive funds or complicated annuities with hidden fees.
And then there are the robots.
“Robo-advisors” are computer programs that ask you questions online and set up a portfolio for you. And, unlike many in the investment industry, they are fiduciaries, with a legal obligation to put clients’ interests first.
Robo-advisors have been winning attention, and assets. Two of them, Wealthfront and Betterment, have attracted more than $2 billion each in client money in the last few years. Their algorithms can automatically put people in low-cost exchange- traded funds, regularly rebalance portfolios, and look for tax savings.
Others, such as Financial Guard and Personal Capital, help investors easily view and evaluate all their investment accounts, including 401(k)s and IRAs. Along with the startups, heavyweight money managers are launching robo-advisor services. Charles Schwab started its own offering in March and already is managing about $3 billion. That’s a tiny share of the industry but signals investors’ interest in the trend.
As more people turn to robo-advisors, the software has become ammunition in a fierce fight over what advisors owe their clients. The Obama administration wants all advisors handling retirementaccounts to promise to put their clients’ interests first. It proposed a rule in April to force those advisors to make that promise. The investment industry and its allies in Congress say the rule would subject millions of middle-class investors to higher costs.
But robo-advisors can serve small investment accounts for a fraction of the price of human advisors, while already complying with the stricter rules. Secretary of Labor Thomas Perez repeatedly pointed to Wealthfront, which launched in 2011, while testifying to Congress last week.
“Wealthfront is living proof that not only is it possible to provide fiduciary service at low cost to small investors nationwide, but that the market rewards these efforts,” Perez said. Wealthfront charges nothing on the first $10,000 invested and a fee of 0.25 percent per year on anything above that.
Robo-advisors aren’t right for everyone. Their advice can be generic. People with complicated finances, or those who need some handholding, may benefit from a person to talk to. If that’s you, and you’re concerned about biased advice, ask the advisor if he or she is a fiduciary first.
The brokerage industry argues that a rule requiring advisors to be fiduciaries would raise the costs it bears for serving small accounts and limit choices for investors. Some in Congress are trying to pass legislation to block the Department of Labor from implementing its rule. A comment period on the rule ends July 21, though the regulation won’t be finalized until next year.
Not all, or even most, non-fiduciary advisors take advantage of their clients. But those advisors can have incentives to push clients into products that may not be right for them. Biased advisors can do the most damage when they help roll 401(k) retirement plans into individual retirement accounts, or IRAs.
In a three-month Bloomberg investigation last year, former employees of AT&T Inc., Hewlett-Packard Co., and United Parcel Service Inc. complained that brokers had persuaded them to roll their 401(k)s into high-cost, unsuitable IRA investments.
That’s the sort of thing a fiduciary rule is designed to prevent. “A lot of people don’t seek advice right now, because they don’t trust the advisors,” Perez testified.
As in science fiction, the digital fiduciaries are, inevitably, evolving. Human-robot hybrid models may become more common as technology helps advisors work with clients more efficiently.
In May, Vanguard Group officially launched a service that combines programmed advice with the option to talk to a flesh-and-blood advisor over the phone or the Internet. Schwab is offering its technology to advisors for a fee of as much as 0.1 percent of assets per year; only independent advisors who are fiduciaries are eligible to sign up.
Meanwhile, the number of human advisors is shrinking, down 12 percent since 2008, Cerulli Associates estimates. The number of “self-directed” investors is growing 4.9 percent a year, according to research firm Celent. And even as lobbyists fight the proposed rule, more of the remaining human advisors switch every year to fiduciary status.