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03-05-2016, 09:34 AM
A worthy article to read on robot advisers...
The pros and cons of using a robot as your investment adviser
NEW YORK — Should you trust your hard-earned retirement dollars to a robot?
These robots, of course, are not like those you see in the movies. But they are capable of providing investment advice usually delivered by a human adviser sitting behind a desk — and for a lot less money.
So-called robo-advisers, which assemble investment portfolios after customers answer a series of questions online, have been widely praised for their easy, low-cost approach to investing. The automated services, which include start-ups such as Betterment and Wealthfront, along with offshoots from established players such as Schwab, have quickly amassed US$53 billion (S$71 billion) under management in just a handful of years, according to estimates by Aite Group.
But, recently, critics have raised questions about their limitations.
The flow of funds into robo-adviser accounts is expected to accelerate because of new federal regulations that require all financial professionals to put their customers’ interests first, at least when providing advice on their tax-advantaged retirement accounts. The rules, issued by the United States Labor Department, are expected to push more customers into lower-cost investments.
Aite predicts that robo-advisers will collect nearly US$285 billion by 2017, still a small portion of the US$20 trillion in retail investors’ assets held at brokerage firms and registered investment advisory firms.
Robo-advisers were already required to follow the highest standards of consumer protection — on every dollar they manage, not just retirement money — because most of them are registered investment advisers. That means they are required to act as fiduciaries, the legal term meaning they must put customers ahead of all else. And it is a banner the robo-advisers wave proudly.
Given their status, the Labor Department, which oversees retirement accounts, has essentially given robo-advisers its blessing, since many firms avoid the conflicts of interest embedded in the way the brokerage industry and its armies of representatives conduct their business.
But, at the same time, other regulators have raised concerns about whether robo-advisers are thorough enough when gathering information about investors. 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 that robo-advisers try to wriggle 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 US$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 Mr William F Galvin, Massachusetts secretary of the commonwealth, who likened the services to driverless cars. “You need a human that is responding to them.’’
Mr 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 personalised 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?’”
Many robo-advisers say they make their limits clear, noting 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 Mr Adam Nash, CEO of Wealthfront, a robo-adviser managing more than US$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.”
The Massachusetts regulator and other industry critics argue that robo-advisers should go further, evaluating assets held elsewhere before investing customers’ money. (Wealthfront and Betterment already have technology in place that lets customers connect as many accounts to their services as they would like, giving the firms a bird’s-eye view of a client’s assets. But, for now, they do not factor that into their investment analysis.)
So, exactly how deep are robo-advisers required to go? The law and legal precedents that govern investment advisers, and that shaped fiduciary duty, do not specifically spell that out. But several legal experts seem to agree that advising on a portion of an investor’s financial life is fine.
“It is not unusual for clients to expressly or secretly withhold information from their advisers about other assets,” said Mr Mercer E Bullard, a professor at the University of Mississippi School of Law. “For example, if a 35-year-old says, ‘I’m not going to tell you what other assets I own and I want you to invest US$100,000 for my retirement’, you can do that with disclosure that the allocation might be different if you knew all of their assets.”
Ms Kara M Stein, a commissioner at the Securities and Exchange Commission (SEC), recently said the idea of a robot that generates advice certainly bumps up against the traditional view of a fiduciary, which is based on a human relationship.
“We should be asking whether these new robo-advisers can be neatly placed within our existing laws,” she said in a November speech. “Or, do we need certain tweaks and revisions?”
Ms Mary Jo White, chairwoman of the SEC, said in a March speech that as part of the commission’s effort to monitor emerging automated investment models, staff members from its exam programme were looking into robo-advisers. “Through these inspections”, she said, “we deepen our knowledge of the range of services provided, as well as the challenges associated with different automated models.”
And last May, the SEC and the Financial Industry Regulatory Authority (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, but not realise that the investor needs some of the money in a few years to buy a new home, said the regulators.
There is also a hybrid breed of robo-adviser, with human advisers who rely heavily on computer-driven portfolios. These include Personal Capital and Vanguard Personal Advisor Services.
FINRA issued a report just last month, providing guidance for investors and advisers using such automated services. The report suggested that investors evaluate whether a firm is gathering enough information to understand their needs and stomach for risk. THE NEW YORK TIMES
http://www.todayonline.com/tech/pros-and...nt-adviser
The pros and cons of using a robot as your investment adviser
NEW YORK — Should you trust your hard-earned retirement dollars to a robot?
These robots, of course, are not like those you see in the movies. But they are capable of providing investment advice usually delivered by a human adviser sitting behind a desk — and for a lot less money.
So-called robo-advisers, which assemble investment portfolios after customers answer a series of questions online, have been widely praised for their easy, low-cost approach to investing. The automated services, which include start-ups such as Betterment and Wealthfront, along with offshoots from established players such as Schwab, have quickly amassed US$53 billion (S$71 billion) under management in just a handful of years, according to estimates by Aite Group.
But, recently, critics have raised questions about their limitations.
The flow of funds into robo-adviser accounts is expected to accelerate because of new federal regulations that require all financial professionals to put their customers’ interests first, at least when providing advice on their tax-advantaged retirement accounts. The rules, issued by the United States Labor Department, are expected to push more customers into lower-cost investments.
Aite predicts that robo-advisers will collect nearly US$285 billion by 2017, still a small portion of the US$20 trillion in retail investors’ assets held at brokerage firms and registered investment advisory firms.
Robo-advisers were already required to follow the highest standards of consumer protection — on every dollar they manage, not just retirement money — because most of them are registered investment advisers. That means they are required to act as fiduciaries, the legal term meaning they must put customers ahead of all else. And it is a banner the robo-advisers wave proudly.
Given their status, the Labor Department, which oversees retirement accounts, has essentially given robo-advisers its blessing, since many firms avoid the conflicts of interest embedded in the way the brokerage industry and its armies of representatives conduct their business.
But, at the same time, other regulators have raised concerns about whether robo-advisers are thorough enough when gathering information about investors. 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 that robo-advisers try to wriggle 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 US$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 Mr William F Galvin, Massachusetts secretary of the commonwealth, who likened the services to driverless cars. “You need a human that is responding to them.’’
Mr 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 personalised 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?’”
Many robo-advisers say they make their limits clear, noting 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 Mr Adam Nash, CEO of Wealthfront, a robo-adviser managing more than US$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.”
The Massachusetts regulator and other industry critics argue that robo-advisers should go further, evaluating assets held elsewhere before investing customers’ money. (Wealthfront and Betterment already have technology in place that lets customers connect as many accounts to their services as they would like, giving the firms a bird’s-eye view of a client’s assets. But, for now, they do not factor that into their investment analysis.)
So, exactly how deep are robo-advisers required to go? The law and legal precedents that govern investment advisers, and that shaped fiduciary duty, do not specifically spell that out. But several legal experts seem to agree that advising on a portion of an investor’s financial life is fine.
“It is not unusual for clients to expressly or secretly withhold information from their advisers about other assets,” said Mr Mercer E Bullard, a professor at the University of Mississippi School of Law. “For example, if a 35-year-old says, ‘I’m not going to tell you what other assets I own and I want you to invest US$100,000 for my retirement’, you can do that with disclosure that the allocation might be different if you knew all of their assets.”
Ms Kara M Stein, a commissioner at the Securities and Exchange Commission (SEC), recently said the idea of a robot that generates advice certainly bumps up against the traditional view of a fiduciary, which is based on a human relationship.
“We should be asking whether these new robo-advisers can be neatly placed within our existing laws,” she said in a November speech. “Or, do we need certain tweaks and revisions?”
Ms Mary Jo White, chairwoman of the SEC, said in a March speech that as part of the commission’s effort to monitor emerging automated investment models, staff members from its exam programme were looking into robo-advisers. “Through these inspections”, she said, “we deepen our knowledge of the range of services provided, as well as the challenges associated with different automated models.”
And last May, the SEC and the Financial Industry Regulatory Authority (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, but not realise that the investor needs some of the money in a few years to buy a new home, said the regulators.
There is also a hybrid breed of robo-adviser, with human advisers who rely heavily on computer-driven portfolios. These include Personal Capital and Vanguard Personal Advisor Services.
FINRA issued a report just last month, providing guidance for investors and advisers using such automated services. The report suggested that investors evaluate whether a firm is gathering enough information to understand their needs and stomach for risk. THE NEW YORK TIMES
http://www.todayonline.com/tech/pros-and...nt-adviser
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