Don’t Rely Too Much on Robo-Advisors for Wealth Management

$15.7 billion is the amount of money managed by online investment platforms dubbed as robo-advisers. By analyzing 11 leaders in the field this December, Corporate Insight has determined that since its last analysis, these robo-advisers have taken more than another $3 billion under management for a total of nearly $19 billion. The robo-advisor space includes online platforms such as Wealthfront, Betterment, AssetBuilder, Covestor, Financial Guard, FutureAdvisor, Jemstep, MarketRiders, Personal Capital, Rebalance IRA and SigFig.

In recent years, the number of online execution-only investment platforms has risen dramatically. These, such platforms allow you to buy and hold different assets, like shares, bonds and funds, within tax wrappers like ISAs and SIPPs, or even outside of them as singular investments. Part of the benefit is that you can conveniently hold your investments in one place, making it easier to monitor performance and make time-sensitive decisions while on the go. Most modern day execution-only platforms offer access to company details, thorough research and easy-to-manage online trading tools.

However, the Securities and Exchange Commision (SEC) and the Financial Industry Regulatory Authority (FINRA) have jointly cited concerns over the use of these robo-advisors. The two regulatory bodies have publicly cited warnings to investors advising them to clarify the risks, limitations, and fees around these automated investment tools before opting for them. Here are the major aspects that investors should ponder upon before opting for robo-advisors:

  • Investors should clarify the associated fees and expenses involved before selling or purchasing investments.
  • Inquire about these automated investment tool providers on the form of compensation they receive for their services.
  • Get clarification on the associated clauses pertaining to termination of agreement upon termination of usage of the tool.
  • Inquire about assumptions based on which these tools run their algorithms.
  • Be aware whether these tools have been programmed to consider limited options pertaining to investments.
  • Exercise caution regarding the kind of information being provided to these tools as it directly/indirectly impacts the output.
  • Be aware of risks around these tools not being able to assess all the specific circumstances associated with the investment evaluation.
  • Be aware of risks around these tools collecting personal information for purposes unrelated to evaluation of the investment.

There are many different types of platforms out there and investors should pick the one which is right for their needs. For example, some platforms offer foreign exchange services and ability to trade shares, which could be a total turn-off for someone looking to simply create a simple portfolio and who want some help along the way.