The Anatomy of a Robo-Adviser: Part Robot, Part Adviser, Part…You?

By Majda Muhic & Qudsia Shafiq, Spring 2017 IAC Student Interns

Robo-advisers, like all other products, come in many different shapes and sizes. The SEC acknowledges that “robo-advisers operate under a wide variety of business models and provide a range of advisory services,” and provides multiple examples of how robo-advisers may vary:

  1. Robo-advisers are based on different business models.

“Some robo-advisers operate as stand-alone companies, while others are business units of larger, traditional investment advisers.”

  1. Robo-advisers can offer varying levels of human interaction to their clients.

“Some robo-advisers provide investment advice directly to the client with limited, if any, direct human interaction between the client and investment advisory personnel. For other robo-advisers, advice is provided by investment advisory personnel using the interactive platform to generate an investment plan that is discussed and refined with the client.”

  1. Robo-advisers may use a range of methods to collect information from their clients. “Many robo-advisers rely solely on questionnaires of varying lengths to obtain information from their clients. Other robo-advisers obtain additional information through direct client contact or by allowing clients to provide information with regard to their other accounts.”
  1. Robo-advisers vary in the method they use to deliver services to their clients.

“Some robo-advisers enable clients to access their services directly. Other robo-advisers are offered as digital portfolio management tools by traditional advisers that view these programs as components of their existing advisory practices.”

Why is this important? Depending on which robo-adviser you’ve chosen, it is important to know how much of that service is being controlled by a robot (which is most likely some form of technology using an algorithm-based program), a (human) adviser (which may or may not exist, depending on the company), and you (the investor, who may elect a hands-on or hands-off approach to controlling your investments). This way, you understand both your and your robo-adviser’s role in your investment and there aren’t any unexpected surprises when something goes awry.   In fact, because the business models can vary significantly from one company to another, it’s easy for clients to be confused about the role of their particular robo-adviser. Thus, the SEC emphasizes that proper disclosures of the robo-adviser’s workings are key.