Episode 1: The Rise of the Algorithms

 

There has been a lot of discussion recently about so called robo-advisors like Wealthfront and Betterment.  But what is a robo-advisor, really? Are there any real benefits from such, and is such a construct even legal?  I am going to write several pieces looking at this issue in more detail but I wanted to hit on a few points in this piece.

To the point, a robo-advisor is, fundamentally, a computer driven investment algorithm which can invest money based on an investors answers to an online questionnaire.  In exchange for this investment “advice” they charge a small fee of 0.25% according to their website.

Robo-advisors are considered fiduciaries by the SEC and register as such.  I find this to be very interesting since I have never met a computer that can connect a client’s needs, risk tolerance, and behavioral tendencies.  The SEC and Congress have been struggling over the definitions around a fiduciary so it should not be surprising that a computer could be considered a fiduciary.  Just out of curiousity I looked up the legal definition of a fiduciary.

 

Fiduciary 1) n. from the Latin fiducia, meaning “trust,” a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty.

 

So based on that definition since a non-breathing entity like a bank can be a fiduciary then a computer based algorithm can be a fiduciary as well.

Robo-advisors have been gaining assets and seem to be a fit for investors who don’t want to have any input on their investment decisions or any customization built into their portfolios.  I think that the regular CNBC contributor, Josh Brown, has rightly said in his blog on December 27, 2013, that robo-advisors have a place and are good for disciplined investors that don’t have a lot of money to invest.

I will be writing more on this topic but if you are looking for a living breathing person, and not a computer, to discuss your goals, needs, and investment portfolio we are here to listen and help.

A non-computer generated Thought From The Factory on Main

 

Peter