Even as you read this article, there are state and federal regulators hard at work trying to figure out how to properly regulate the growing number of websites offering automated financial advice. Known as ‘robo-advisors’, these platforms use a host of analytical tools and a ton of data to ‘advise’ investors about where they should put their money. And because robo-advice is quickly catching on, it is becoming increasingly more apparent that the government will step in at some point.
More important is whether robo-advice will ever be the norm. In other words, will the vast majority of investors start turning to automated platforms under the impression that, because the ‘robo-advisors’ are not human, they are incapable of biased advice? It is a legitimate question that has to be answered before this emerging platform gets too big. How it is answered will directly affect how robo-advice is eventually regulated.
When People Avoid Financial Advice
Western International Securities, a independent broker-dealer, works with financial advisors across the country. They know, just as their advisors do, that there are a lot of low-volume investors who would just as soon go it alone or use an automated platform rather than talk to a human being. They also know that there are plenty of would-be investors who have simply not gotten involved because they do not want to talk a financial advisor. But why?
In an article published by the Regulatory Review, author Griffin Davis mentioned some of the weaknesses of the current financial services industry in discussing problems related to regulating robo-advice. Among those weaknesses is the reality that financial advisors often tailor their advice to boost their own commissions.
This is a reality that cannot be avoided in as much as financial advisors have to earn a living. And yet, knowing a financial advisor is not truly independent and unbiased gives some low-volume investors an impression of advisors that is barely higher than the used car salesperson or the personal injury attorney.
Investors who fail to seek proper advice may also be afraid that they will not understand the advice given. They worry that they will be urged to buy products that are not in their best interests, or that they will miss out on a great opportunity because they don’t understand what’s going on around them. The appeal of robo-advice is based on a perception that it either eliminates or significantly reduces all the weaknesses of human advice.
Already on the Move
Davis pointed out in his article that the robo-advice market is already on the move. Big names like BlackRock and Vanguard have already implemented their own automated advice platforms they now offer in conjunction with advice given by human advisors. These platforms use complicated algorithms to try to provide the best possible advice as investor circumstances change.
Industry experts say that if future regulations are to be effective, regulators have to look at these algorithms in every minute detail. They need to understand how platforms collect and analyze data, how that data is used, and what safeguards are in place to prevent the robo-advisor from giving bad advice.
The complexity of regulating robo-advice suggests that it will take some time before automated advice platforms truly reach maturity. Few financial advisors doubt that the day of maturity will eventually arrive. The good news for financial advisors is that automated platforms are not likely to replace them entirely. Computer hardware and software can do a lot of things, but it cannot have in-depth conversations capable of building relationships as solid and helpful as those investors have with their trusted advisors.