Technology continues to play an increasingly larger role in our lives, making things faster, more convenient, easier. It takes but a mere click of a button to order any number of products from Amazon that can be delivered to your door the next day. As someone who doesn’t cook, I’m a big fan of food delivery apps. And consider the fate of businesses without the software that has allowed us to work remotely through the uncertain times of the COVID-19 pandemic.
Technology has thoroughly penetrated the workings of the financial world as well, including one of the most popular trends of recent years, robo-investing. As defined at investopedia.com, robo-advisors are “digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client assets.”
Robo-investing has become particularly popular with millennials. According to researchers at the Aite-Novarica Group, 70 percent of households with a net worth of at least $500,000 where the head of the household is under age 45 used either a “strongly or mostly self-directed” investment style in 2019, up from 57 percent in 2010. But it’s not only millennials. In 2021, the research firm noted, an estimated 3.5 million people used a robo-advisor to handle their portfolios, an increase of about 22 percent from the previous year.
Clearly, there is an appetite for the technology, which is perceived as more convenient and less costly than engaging a financial advisor. But there are risks that investors should be aware of.
SEC warnings
The Securities and Exchange Commission (SEC) recently revealed they had issued deficiency letters to nearly all robo-advisors. The SEC uses the letters to indicate a deficiency or omission in a registered statement or prospectus. The primary deficiency noted among robo-advisors was a failure of their fiduciary duty to provide advice that serves each client’s best interests.
“When robo-advisors fail to comply with regulatory obligations,” the SEC noted, “investors may experience poor outcomes.” The SEC went on to explain that the digital advice fails to capture a client’s risk tolerance and could lead to investments that don’t accommodate the client’s best interests. The robo-advisors, they found, either didn’t have policies or procedures in place to ensure clients were getting advice in their best interests, or the policies and procedures they had were inadequate or generally ignored. They also identified misrepresentations and misleading statements on the robo-advisors’ websites and in their advertising.
Typically, robo-advisors’ recommendations are based on a few data points as opposed to looking at a client’s entire financial picture. And once the portfolio is set up, there is often no follow-up, no reviews to determine if the client’s situation, needs, and goals have changed.
Fiduciary, independent, and tax-wise
As a fiduciary, HBKS Wealth Advisors is required to always act in the best interests of our clients. But more than a requirement, it is fundamental to how we work, developing a financial plan for a client well before we put together an investment portfolio.
As a registered independent advisory (RIA), we don’t represent any investment brands but offer our clients access to an entire universe of investments. We regularly review our clients’ portfolios with them, staying on top of the changes in their lives and adjusting their portfolios, including for special events like saving for a child’s wedding or to buy a vacation home.
Unique to HBKS and how we work with our clients is our access to an in-house CPA firm, a Top 50 U.S. accounting firm, with whom we collaborate to develop and maintain tax-wise portfolios that are current with ever-changing tax laws, maximizing portfolio performance by maximizing after-tax returns.
For more information about fiduciaries, financial planning, and tax-wise investing, contact us at 724-934-5300, or email me at bdusch@hbkswealth.com.
IMPORTANT DISCLOSURES
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.
The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
