In response to my last blog, 5 Reasons Most Robo-Advisors Are Not, in Fact, Advisors, an industry “consultant” sent me an email that included one concern and a couple of poignant comments that help clarify the “robo advisory business.” First, here’s his concern: 

“Your latest installment starts right out of the gate with the implicit premise that active management leveraging sophisticated portfolio analysis – code in full service advisory firms for “What are we selling this month?” – results in superior performance. The facts just don’t bear that out. Money invested in an S&P 500 index fund has always outperformed 95 percent of all actively managed “large cap” funds.”

He was referring to this sentence in my blog: “In the robos I’ve looked at, the algorithms for choosing investments and managing client portfolios are so rudimentary that competitive long-term performance is unlikely, while the potential for taking a large hit to value in the next market ‘correction’ is quite high.”

I can see how he might have gotten the above impression from what I wrote, but I wasn’t addressing active vs. passive management at all. In general, I’m a fan of passive investment management/indexing. In fact, I believe (and have written) that advisors should be required to justify in writing that their recommendations of more expensive actively managed funds are in the best interest of their client. 

My comment about robos was based on my research that at least some robos use very questionable strategies to create client portfolios: perhaps the most egregious example that I’ve come across is a robo that selects mutual funds (and some ETFs) based solely on their performance over the past 12 months. Their marketing material states that other advisors who don’t recommend exclusively these “top performing funds” are costing their clients money. Which is true: right up until next year’s crop of top performers turns out to be different from this year’s crop. You get the point. 

The consultant went on to say: “I am currently helping several firms articulate their robo strategy, whether that’s playing offense or defense. It’s been very difficult to steer them away from using their robo platforms as another avenue to further their alignments/affiliations with asset management firms who want to place product in their distribution channels. Unfortunately, I think most firms building a robo capability consider it just another [distribution] channel.” 

This suspicion was confirmed in a conversation I had the other day with Babara Roper, the Consumer Federation of America’s director of investor protection. In response to the criticisms of robos that I wrote about in the above mentioned blog (conflicting sources of revenues, self-dealing, and low standards of client care) she said: “Well, how’s that any different from the rest of the financial services industry?” 

With the notable exception of independent RIAs, it isn’t any different. And that’s my point about robo “advisors.” They don’t represent a “new” entry into the financial services industry. They are merely a digital delivery system for the old financial services industry, rife with all of its conflicts and client abuses. 

Fifteen years ago, businesses that had websites were “cool.”

Now, if you don’t have a website, you’re a dinosaur. In fact, today, you’re still a dinosaur if you do have a website but you’re not on Twitter, Facebook and LinkedIn.

How long do you think it will be before everyone in financial services offers some form of online, automated portfolio management? And it will be, at least in my view, the business of independent advisors to help clients who have been abused by this new version of financial services—just as they did for clients of the old version.