Are Robo-Advisers in Your Future
~ By Gerald Rome, Colorado Securities Commissioner ~
It seems every day there is some new business that takes advantage of technology. Want a taxi? Use the internet on your phone to get an Uber driver to pick you up. Need a hotel room? Rent someone’s house on a web site through Airbnb. Owe your friend some money, use Venmo, a digital wallet that lets you make and share payments with friends through an app on your phone. Need a financial adviser, just hire a robot. Hire a robot? Yes, that’s right. Rather than having a “real” human being as your financial adviser, you can now hire a robot, or robo-adviser. Robo-advisers are software programs that collect information regarding your financial goals, income, and risk tolerance. The automated adviser will then manage your investment funds through the use of mathematical rules called algorithms. There is almost no human interaction.
Why would anyone want to use a robo-adviser to help with them with their retirement funds or savings. As with most technology, the robo-advisers can provide financial advice for lower fees than using a human adviser. They also generally accept lower account minimums than their human counterparts. Because of this, they are becoming popular with people who are just starting out with investing or who have limited funds at their disposal. But we have also discovered that these services are proving popular among retirees and near retirees.
Would I recommend that you use a robo-adviser? While there may be cost savings, it is important to understand their risks and limitations before using them. You should consider a few basics before hiring your robo-adviser. First, what level of human interaction is important to you? While limited human interaction may result in reduced fees, many people feel more comfortable having often complex investment decisions explained by a person they trust. What information is being used? Before you decide to create an account with a robo-adviser, it’s important that you understand how the system works. Robo-adviser systems are limited to the information provided, and do not seek out new information or research potential options in the same way that a human adviser would.
Again, operating off a software program can reduce errors, but also reduces options and puts more impetus on you to update your profile information, and to also make you aware of the potential risks involved with specific portfolios and products. As with any traditional adviser, you should also be aware of fees associated with robo-advisory services, and ensure that if fees change over time they are properly disclosed.
While it is a fast-paced industry, regulators are doing our best to keep up with this new technology, and still require that any service providing investment advice or conducting securities transactions be properly licensed. Therefore, remember that even if you are not dealing with a human, you still need to verify the license of the service and the registration of the product or offering with the proper authorities. Visit www.investor.gov to conduct an online search, or call us at the Division of Securities – (303) 894-2320 – for assistance verifying this information. The basic rules remain the same: ask questions, do your homework, and always report suspicious activity to your local securities regulator.