Attack of the Robo-Advisors? Or Just a Cheaper Version of Your Human Advisor?

The last two decades have dramatically changed the world we live in. The internet, once a novel technological curiosity that was occasionally accessed after minutes of waiting through annoying dial-up noises, has penetrated every corner of our daily life. The resulting innovations in a relatively short period of time are astounding.

While still sluggishly ambling along behind many other sexier and innovative industries, the financial sector has witnessed some changes as well. Online DIY stock trading, the wide adoption of low-cost investment vehicles, the limitless flow of information (or disinformation) on financial markets at our fingertips, and the polarizing advent of crypto currency like Bitcoin have all caused disruptions and contributed to new innovations in the wide world of finance.

Despite the slew of new ideas, one area that has been notoriously digging in its heels is the investment advisory sub-industry. Investment advice has been around for quite some time, and it has become essentially a commodity. Everyone from your local bank, broker-dealers and investment banks, insurance companies, and tax preparation companies have all rushed to offer their two-cents on where you should be putting your money. Enter stage left a newcomer to the fray: the robo-advisor.


What Is a Robo-Advisor?

Before tackling this question (assuming you don’t already know), let me first review the historical “human advisor” experience for those of you who have avoided enduring such an activity. Whether you go to a broker-dealer, your bank, or any other place, the experience is roughly the same: a securities registered advisor (either in person or on the phone) takes down some information on your financial situation and recommends an investment portfolio “tailored” to you. How is a robo-advisor different?

A robo-advisor essentially limits the human interaction and intervention in your investment plan and portfolio. You enter your personal information online, and the robo-advisor provides you with an automated plan and portfolio allocation using various mathematical algorithms.

These technology driven advisors have really picked up momentum the last couple of years. Many of them have seen explosive growth, new startups have been created, and even some big name brokerage firms have been quick to pick up on the trend and now offer their own version of the service. But why the need for them in the first place?


Iatrogenesis and the Race to the Bottom

The two most common arguments I hear for automated robo-advisor investing are lower costs and the elimination of human error. The former is obvious, and represents a continued race to the bottom of the pricing barrel within the financial world. Commissions and fees are a drag on investment performance, so any way to reduce them represents a higher return to the investor (or so the argument goes, although this is a completely different topic). Thus the emergence of low cost index funds, DIY discount trading, and now the robo-advisor, with all of the above an attempt to cut out the “middle man” and reduce cost.

The second reason, and I think more intriguing of the two, is the attempt at elimination of human error that represents a drag on performance. It is no little-known fact that oftentimes investors, not excluding investment professionals, make mistakes that erode returns (think irrational and emotional decision making driven by fear or greed). Sometimes we get in our own way and cause more harm than good. The medical community knows this as iatrogenesis, or complications being caused by the medical professional, medical procedure, or treatment; basically restated, it means creating unintended consequences. Such iatrogenic decision making happens in all number of areas of consideration: environmental studies and human attempts to right their impact on our planet, a simple trip to the auto mechanic gone wrong, or probably every politician to have ever made a decision in the history of mankind. The investment community is obviously not immune to unintended consequences, be it from conflicts of interest a financial professional has to deal with, uninformed and uneducated decision making, or just simply fear and greed getting the best of a sound recommendation.

The hope of many, creators of robo-advisors and end users of them alike, is that automated decision making and portfolio management eliminates the human error from the system, therefore eliminating resulting performance drag and providing potentially higher returns (or at least more consistent returns) to the consumer. Simple enough, right?


My Thoughts and Ramblings on the Matter

Let me first state that I am all for technological advancement. I think the financial industry as a whole is especially ripe for innovation. If technology has advanced to the point that our job can be replaced or eliminated, it might be time to shift gears and move on.

That being said, to reason that human interference can ever be eliminated from any system, financial or otherwise, is total folly. Someone created the technology, someone told it how to act and behave, and therefore any design or assumption errors in the system will be present. Even if the principles and inputs backing up a new piece of innovation were perfect, external human error will never be eliminated; how will the system cope with such externalities? Mathematical and algorithmic trading and investing is not new; in fact, it has been around for a very long time (in the form of technical analysis especially). That being the case, it begs asking a few questions about investment strategy based on mathematical inputs, be it from a robo-advisor or from your traditional human in the flesh advisor:

‘What is the stated investment strategy of who or what I am working with? Historically, how closely have they stuck to that strategy?’

‘What has been the historical performance of who or what I am working with? What has been their strategy’s historical performance?’

‘Do I have the patience to stick with that strategy in a variety of market conditions? How do you judge if the strategy is broken and no longer working, and at what point would it make sense to change to a different one?’

‘Does the stated strategy make sense for my personal circumstances at this particular point in time?’

To round out this discussion, I do think there is a place in today’s world for the robo-advisor, algorithm based investing, mathematical based decision making, or whatever you want to call it. However, it would be naïve to think that human input and error can be eliminated. It is equally naïve to think that any mathematical equation can be developed to create the perfect investor experience. So what is the robo-advisor, really? Is it truly game-changing and revolutionary technology, or is it yet another new low-cost alternative designed to inveigle investors into doing business? If they do provide sound advice for you, great! If not, bad advice is still bad advice, no matter how little you spend on it.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.

The “Fiduciary Standard” – What Is It? Why Should We Care?

Nick Rossolillo, President, Concinnus Financial

March 3, 2015


On February 23, 2015, President Obama made comments about the “fiduciary standard” while speaking about retirement savings and investments at AARP’s offices in Washington, D.C. The comments were a call on the Department of Labor to draft new laws requiring financial professionals working with retirement assets to put client interests before their own. “Wait,” you may be saying, “How can such a thing be enforced? And how can I tell if my financial professional is working in my best interests?” You are not alone. The debate has been going on for quite some time within the financial industry, and was brought into the public’s awareness especially after the financial crisis.

Why the debate? What is the fiduciary standard? And how can you make informed decisions as an investor and saver?


History of the Fiduciary Standard

In the wake of the Great Depression, a slew of new regulations emerged in an attempt to crack down on sales practices in the financial world. Two such acts, which are relevant to our particular discussion, were the Maloney Act of 1938 (an amendment to the Securities Exchange Act of 1934), and the Investment Advisors Act of 1940.

The Maloney Act established the NASD, which has since morphed into what we now call the Financial Industry Regulatory Authority (or FINRA). Among other duties, FINRA regulates broker-dealers, or individuals or companies who charge a commission to clients for selling stocks, bonds, mutual funds, etc.

The Investment Advisors Act of 1940 authorized the Securities and Exchange Commission (or SEC) to regulate investment advisors. An investment advisor charges a fee (either an hourly rate, a flat annual fee, or a percentage fee based on total account value) to clients rather than a commission.

Ok, are you completely bored yet, or are you still with me? What is the debate about exactly?


Commissions vs. Fees

In the aftermath of the world’s most recent economic crisis, heated debate has surfaced about the charging of commissions versus the charging of a fee. Many financial professionals who charge a commission (are a broker-dealer and are regulated by FINRA) have to reasonably believe that a recommended investment is “suitable” for the client. In contrast, professionals who charge a fee (are an investment advisor and are regulated by the SEC) are held to the “fiduciary standard.” Basically, the fiduciary standard is this:

  1. Investment advisors must make reasonable investment recommendations independent of outside influences.
  2. They must always place client’s best interests ahead of their own.

This is not to say that professionals who charge a commission do not follow this standard. However, only investment advisors regulated by the SEC are held to this fiduciary standard by law. At this point you are no doubt asking, “How do I know if my advisor is really acting in my best interests? I don’t read minds.”

The most recent proposal, brought up again on the 23rd of February, would enforce a fiduciary standard on all financial professionals handling retirement assets. This would be done by eliminating commissions and only allowing a fee to be charged for the handling of retirement assets. This would, in theory, eliminate conflicts of interest arising from the high commission investment products many financial companies offer.


Arguments For and Against Commissions-Based Investing

Those in favor of keeping commission based investments argue a few main points:

  1. Eliminating commissions would reduce the investment options investors have, since some investment types are offered mainly on this basis.
  2. Over the long-term, paying a commission instead of an ongoing fee is cheaper for clients.
  3. Enforcing a fiduciary standard will raise costs for financial firms, which will be passed on to clients in the form of higher fees.

There are a few assumptions this argument is making. First is that some investment vehicles only work if they are high cost on the front end (or that a commission is charged and paid). Second is that once a commission is paid, there are no additional client charges that occur within the investment vehicle. Third, an assumption is made that clients will hold, and be encouraged to hold, investments over the long-term, thus not incurring additional commissions.


Arguments For and Against Fee-Based Investing

Those in favor of fee-based standards argue this:

  1. Conflicts of interest arising from investment products being offered with a higher commission are eliminated.
  2. Client and financial professional interests are aligned when the financial professional’s pay is tied to investment performance.
  3. Investment decision making and advice is improved and becomes more objective.

Some of the arguments from the opposite angle arise here as well, specifically the ongoing cost argument. Why would a client interested in buying ‘investment XYZ’ and holding it indefinitely continue paying a fee every year for investment advice they don’t need? Also, a fee-based advisor faces a conflict of interest in that they may not offer other types of products (such as insurance) that is based off of a commission. Obviously, the two sides of the argument are not perfect.


What Can You Do?

Until some concrete decisions are made surrounding the debate, you as an investor have some decisions to make. Start by asking yourself a few questions such as this:

‘How knowledgeable and comfortable am I managing my own investments?’

‘What type of investment am I looking to make?’

‘Do I need financial advice outside of the decision making that goes on inside my investment portfolio?’

‘What exactly am I looking for in a financial professional? Is it product driven (i.e. you are investing for a future need, you currently require income, or you need a specific product like insurance) or relationship driven (you need someone who can answer your financial questions and provide education)?’

Also bear in mind that many professionals have a foot on both sides of the line. As an example, they may offer fee-based investment management but also offer insurance products that pay them a commission. When consulting a financial professional, make sure you know exactly what you are getting from them and how they are going to be paid.

Simply put, do your own homework! Make sure you understand costs, the nature of the costs you are being charged, and what you are getting in return.


Nick Rossolillo is the president and founder of Concinnus Financial, based in Spokane, WA. He works with individuals and small businesses creating personalized investment portfolios and helping with financial planning. To contact Nick, visit, email him at, or call (509) 220-1895.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing in securities is subject to risk and may involve loss of principal.