The Securities and Exchange Commission (SEC) runs a website called Investor.gov that has a bunch of investor education resources, as well as advisory bulletins, and other reports. Today, they released an Investor Bulletin: Robo-Advisors.
There are a lot of people, myself included, who think that various forms of robo-investing, robo-advising, or as they like to say in Silicon Valley, fintech (financial technology) will be a big part of smart financial planning in the future. Of course, there are several kinds of robo-advisors already. I’ve profiled some of them here on this site. I wrote a stand-alone article about whether robo-advisors are good enough, and a review of Acorns, which is an auto-savings app coupled with a robo-advisor for your savings.
These automated investing services are a potential way for you to not need a financial advisor while still getting some help with the money you do invest.
That being said, the whole robo-advisor thing is pretty new, and there are a lot of varieties. I think I’ll spend the next several months reviewing different robo-advisors and looking into how the various offerings work, but for now, I was curious about what the SEC had to say about robo-advisors in its investor bulletin.
Do You Really Want a Robo-Advisor?
Curiously enough, the bulletin actually says very little. The whole first part is basically asking are you sure you don’t want a human advisor instead. Under headings like “What Level of Interaction with a Person is Important to You?” it goes on to point out that if you use and automated advisor, you may have limited ability to actually speak with a person. This is sort of the entire point of a robo-advisor, so I’m not really sure who this is for, but I suppose someone might be overthinking how much human attention you might get.
What Does The Robo-Advisor Do?
Next up is what you probably really care about. How is the robo-advisor making decisions. There’s no real information here, instead there are a a bunch of questions that you can ask to evaluate robo-advisor / robo-investor programs. They are all good things to consider, so if you don’t know what to look for when evaluating a robo-advisor program, the bulletin is a good place to start.
Then comes the most interesting piece. Many robo-advisors use Exchange Traded Funds, or ETFs for the investing. The idea is probably that ETFs offer the flexibility of intra-day pricing, and if you are using large enough ones, plenty of liquidity to move funds in and out based on your model’s triggers. I suppose if you have any sort of concerns about ETFs, then many robo-advising programs won’t be for you. Although, if you trust a computer to handle your investments, it seems weird to draw the line at what are essentially robo-products.
There is a quick callout box about tax-loss harvesting. That is an interesting potential feature. I’ll cover that later, but unless you really have a pretty large capital gains issue each year on your taxes, it’s only going to have a minimal effect on you.
Finally, as always, you need to pay attention to fees and expenses. Robo-advisors are typically cheaper than human financial advisors, that’s one of their main draws. That doesn’t mean that they are all cheaper, or have the best expense structure. Be sure you understand what you are paying not just to the robo-advisor, but also with the underlying securities.
In the end, there isn’t much information in this particular investor bulletin, but I suppose for someone considering the idea of using a robo-advisor for the first time, it could be a good place to start.