You're sitting down with your financial adviser and looking her right in the eye. Is she advising you? Or selling you?
Some financial advisers, like doctors and lawyers, have a legal duty to put their clients' interests first. Others are free to sell expensive funds or complicated annuities with hidden fees.
And then there are the robots.
“Robo-advisers” are computer programs that ask you questions online and set up a portfolio for you. And, unlike many in the investment industry, they are fiduciaries, with a legal obligation to put clients' interests first.
Robo-advisers have been winning attention and assets. Two of them, Wealthfront and Betterment, have attracted more than $2 billion each in client money in the past few years. Their algorithms can automatically put people in low-cost exchange-traded funds, regularly rebalance portfolios and look for tax savings. Others, such as Financial Guard and Personal Capital, help investors easily view and evaluate all their investment accounts, including 401(k)s and IRAs. Along with the startups, heavyweight money managers are launching robo-adviser services.
Charles Schwab started its own offering in March and already is managing about $3 billion. That's a tiny share of the industry but signals investors' interest in the trend.
As more people turn to robo-advisers, the software has become ammunition in a fierce fight over what advisers owe their clients. The Obama administration wants all advisers handling retirement accounts to promise to put their clients' interests first. It proposed a rule in April to force those advisers to make that promise. The investment industry and its allies in Congress say the rule would subject millions of middle-class investors to higher costs.
But robo-advisers can serve small investment accounts for a fraction of the price of human advisers while already complying with the stricter rules. Secretary of Labor Thomas Perez repeatedly pointed to Wealthfront, which was launched in 2011, while testifying to Congress last week.
“Wealthfront is living proof that not only is it possible to provide fiduciary service at low cost to small investors nationwide, but that the market rewards these efforts,” Mr. Perez said. Wealthfront charges nothing on the first $10,000 invested and a fee of 0.25% per year on anything above that.
Robo-advisers aren't right for everyone. Their advice can be generic. People with complicated finances, or those who need some handholding, may benefit from a person to talk to. If that's you, and you're concerned about biased advice, ask the adviser if he or she is a fiduciary first.
The brokerage industry argues that a rule requiring advisers to be fiduciaries would raise the costs it bears for serving small accounts and limit choices for investors. Some in Congress are trying to pass legislation to block the Department of Labor from implementing its rule. A comment period on the rule ends July 21, though the regulation won't be finalized until next year.
Not all, or even most, nonfiduciary advisers take advantage of their clients. But those advisers can have incentives to push clients into products that may not be right for them. Biased advisers can do the most damage when they help roll 401(k) retirement plans into individual retirement accounts, or IRAs. In a three-month Bloomberg investigation last year, former employees of AT&T, Hewlett-Packard and United Parcel Service complained that brokers had persuaded them to roll their 401(k)s into unsuitable high-cost IRA investments.
That's the sort of thing a fiduciary rule is designed to prevent. “A lot of people don't seek advice right now, because they don't trust the advisers,” Mr. Perez testified.
As in science fiction, the digital fiduciaries are, inevitably, evolving. Human-robot hybrid models may become more common as technology helps advisers work with clients more efficiently. In May, Vanguard Group officially launched a service that combines programmed advice with the option to talk to a flesh-and-blood adviser over the phone or the Internet. Schwab is offering its technology to advisers for a fee of as much as 0.1% of assets per year; only independent advisers who are fiduciaries are eligible to sign up.
Meanwhile, the number of human advisers is shrinking, down 12% since 2008, Cerulli Associates estimates. The number of “self-directed” investors is increasing 4.9% a year, according to research firm Celent. And even as lobbyists fight the proposed rule, more of the remaining human advisers switch every year to fiduciary status.
