“To them I say don’t believe the hype.”
– Chuck D

“Yo Chuck they must be on the pipe, right?”
– Flavor Flav

(Obscure references to Styx and Public Enemy in the same post? Time for a self-congratulatory pat on the back!)

We’re not going to accuse the financial services industry of smoking crack but we wonder if it’s pushing the robo advisor fad as some sort of opiate for the masses. Moreover is the robo advisor model about providing something useful or is it their means to the end of creating a new market for them to sell a service?

So-called robo advisors purport to provide personalized (albeit limited to investments) guidance. Peel back the layers of the onion and they’re nothing more than an automated rebalancing and cost-basis tracking tool. This isn’t new or novel. These tools have long been available and simply automate mundane functions.

Not to pick on Schwab but we give credit to its CEO (Walter Bettinger) for at least being honest about it. In a recent interview at the Investment Company Institute’s general membership meeting he offered the following nuggets:

“The notion of a fully automated advisory service with no human interaction or support might work for a very small percentage of people but not for the overwhelming majority…”

“I just want to emphasize, it is a capability. It is a tool. I do not believe it replaces what people do.”

“What I reject is the idea that technology will eliminate the responsibility and the needs to have personal relationships.”

“Think of what a quality…advisor or counselor does…It’s a whole pyramid of services…ongoing goal planning and risk evaluation. And maybe the most important thing they do is they play psychiatrist when the market’s going down…The online model hasn’t figured out how to automate being a psychiatrist when the market goes down 40%.”

“The central innovation of robo advising is automating a couple of the easiest parts of that stack

[of services]…some people will be perfectly happy with just that piece, but the idea that it’s going to replace the whole stack, I think, is naive.”

If Schwab doesn’t believe in the robo advisor model then why does it offer it? Is it the same reason that Vanguard (home of the low-cost, fees matter, indexing is the way to go approach) offers ETFs yet rails against them as short-term trading tools? Why do these firms offer such products/services yet belittle them? Is it their best interest they’re looking out for or yours?

The idea of removing the human element is so fraught with risk the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority issued a joint warning as some/many robo advisors:

– receive compensation for offering, recommending and selling certain services/investments
– rely on incorrect assumptions or those not applicable to any individual person but a general profile
– provide flawed recommendations when market outcomes differ from underlying programming assumptions
– ask overgeneralized, ambiguous and misleading questions designed to fit customers into the tool’s predetermined options
– do not safeguard personal data as information collected is used for purposes unrelated to the online tool
– do not assess outside holdings, tax situation, cash needs, willingness to lose money in exchange for potential higher returns, investment experience, etc.

Technology is not an end. It’s a means to it. Pilots fly planes. The auto-pilot helps him or her to do it. So why would a robo advisor be an end instead of just a means?

Caveat emptor!