Because of the structure of these advisory services they seldom get an in depth knowledge of the investors financial life,tax situation or even a full picture of their investment assets. They create the portfolio based on a short questionnaire then implement an allocation chosen from a set of models that are "cookie cutter". There is no opportunity for personal interaction with the client to explain the portfolio allocation in depth or to learn about changes in the clients personal circumstances.
Since these services are licensed as registered investment advisors they are held to the fiduciarcy standard of always acting in the clients best interests. Although the services charge low management fees and make use of low cost ETFs, and use long term strategies with rebalancing and no short term trading--all important elements of a good investment strategy-- many are asking if that is sufficient to meet the fiduciary standard.
Those raising this issue include regulators and legal experts as the NYT recently reported
Many of the points raised here are the same as those I raised in my posts
A robo-adviser does not ask about money held outside of its service, for example, which can provide a distorted picture of a customer’s financial standing. Others argue the robo-advisers try to wiggle out of too much responsibility in their customer agreements.The Massachusetts Securities Division recently put investors and the state-registered investment advisers it oversees — or those with less than $100 million in assets — on notice. In a paper issued this month, it bluntly stated that it did not believe an algorithm alone was capable of serving as a fiduciary, at least not the way robo-advisers are structured now.“I am not sure that many investors, in many cases, can be adequately taken care of by answering questions,” said William F. Galvin, Massachusetts secretary of the commonwealth, who likened the services to driverless cars. “You need a human that is responding to them.’’Arthur Laby, a professor at Rutgers Law School, said investment advisers, as fiduciaries, can limit the breadth of their relationship with clients. Still, he does not view robo-advisers as fiduciaries in the traditional sense because of their inability to address subtleties that may arise in conversation.“They are not able to provide the kind of personalized advice that a customer can get from a human on the phone or sitting across the desk, where the customer can say: ‘Oh, I have a new wrinkle. I might be inheriting assets in the next 12 months,’” he said. “Or: ‘I may need to care for a sick parent. How will that impact the cash I need?’.... last May, the S.E.C. and the Financial Industry Regulatory Authority, or Finra, jointly issued an investor alert on automated investment services that highlighted their risks and limitations. For example, these services may suggest a certain mix of investments, the regulators said, but not realize that the investor needs some of the money in a few years to buy a new home.
Others acknowledge the shortcomings of the" robos" while still arguing they can still meet the fiduciary standard:
Many robo-advisers say that they make their limits clear, noting that they are not in the business of providing full-scale financial planning. But often that kind of information is buried in the fine print.Being a “fiduciary is not about the types of service you offer, it’s about the quality of service,” said Adam Nash, chief executive of Wealthfront, a robo-adviser managing more than $3 billion. “There are financial planners helping you figure out what type of house you should buy. It’s not required that everyone do that.”
I am certainly no expert on the legal nuances of what constitutes adequate service to meet a fiduciary standard. It is clear --even in the view of the head of one of the largest robo advisors--that their service is far less comprehensive than what an investor would get from a personalized relationship with a human being.
With the internal management fees of many exchange traded funds now under .10% it might be worthwhile for investors to consider whether or not and advisory fee of .8 to 1% (remember that fees on this service are tax deductible) in exchange for personalized advice might make more economic sense than paying .25% to a "robo advisor".
For example: a couple with assets split between taxable accounts, IRAs and 401ks simply working with an advisor that looks at all of those accounts comprehensively and is sure to allocate in one comprehensive tax sensitive investment strategy could easily offset the additional fees paid to the "non robot".
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