Advisers need to step cautiously into the robo-world

Regulators are warning the public to be cautious when engaging with robo-advisers. Human advisers would be wise to take the same tack.

The sentiment in the industry about online financial advice has run the gamut from contempt to fear to giddy enthusiasm. At one point, some advisers saw development of automated, algorithm-based investment services — with their efficient, cost-effective features — as a threat to their own more traditional (and costly) one-on-one planning.

Then a lightbulb moment occurred when such platforms started being rolled out to advisers themselves. Suddenly a whole segment of the population advisers couldn’t serve profitably became potential customers. Prospects with few assets who would ordinarily be turned away could now be brought into the fold — especially those who didn’t need the complex planning or hand-holding that consume so much valuable time. A human adviser with a tech counterpart could expand the client pool exponentially.

As the cyborg analogy took hold, more advisers grasped the huge opportunities in matching the best of their human abilities with superfast automation under one business model. The future was now!

OK, everyone, calm down. Take a deep breath. Reason often needs to be inserted when this kind of zeal gets whipped up and the pendulum swings so dramatically from one extreme to the other.

Sure, robos can become a real money-making opportunity, as is often the case with productivity gains ushered in by technology. But don’t ignore the costs.

In their joint alert to investors earlier this month, the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. warned about certain risks particular to engaging with robo-advisers.

A few key takeaways also apply to advisers.

No. 1: Know thy tool. Backward and forward.

Advisers looking to bring a robo-platform into their practice have many options, which are only growing with every passing quarter. Several of the biggest custodians offer third-party robos, such as Fidelity Investments (through Betterment) and TD Ameritrade Inc. (through multiple vendors). And Charles Schwab Corp. is planning to roll out its digital platform for advisers this quarter. The point is that each offering has pros and cons, and knowing them thoroughly is critical.

And it’s not just about what’s best for your business. The fact that regulators are paying attention means advisers acting as fiduciaries better darn well be sure any use of a particular robo is in their clients’ best interests.

What exactly are the terms when it comes to incremental fees, and what conditions are placed on investing options? What assumptions about your clients are baked into asset allocation decisions?

No. 2: Security. Check it or suffer the consequences.

Any third-party tools must be vetted. Though custodians and others offering the services no doubt looked into the products carefully before including them on their platforms, the buck stops with the adviser.

In addition to asking about the robo-platform’s cybersecurity efforts, advisers should create their own security policy detailing potential threats and recovery plans.

SUPERCOMPUTING

Advisers have taken advantage of digital computing for decades with software and web applications. But the particular risks associated with robo-advisers must be weighed and mitigated on their own.

As Mason Braswell and Alessandra Malito point out in their cover story this week, there remains plenty to fear about the potential future of the robo-movement. Is the buddying up (or buttering up) of traditional advisers by the robos simply a Trojan horse that ultimately gets them to relinquish assets?

In addition to considering the long-term picture, advisers shouldn’t lose sight of realities today. Remember: Advisers should use the robo-tool, not be used by it.

So get excited about the opportunities this new technology opens up, but be critical.

Is the platform you are reviewing the best option out there for you? How so? Are costs competitive? How much of the burden will it take off your shoulders in return for the implicit and explicit costs? Do its features address the needs of your current clients and, more importantly, the ones you hope to begin serving with such a tool?

Finally, can you live with the assumptions it will make in asset allocation decisions, and will those benefit clients? Your responsibility to them cannot be offloaded, whether clients rise to the level of personal service or not.