Wednesday’s Word: Robo-Adviser

By Qudsia Shafiq, Fall 2017 IAC Student Intern

Robo-what? Robo-advisers generally refers to algorithm-driven digital tools that provide investment advisory services to consumers often without any – or limited – human interaction via some electronic platform (whether it’s a computer, laptop, tablet, or smartphone). Think: part-robot, part-adviser.

Imagine answering a short questionnaire, all through an app on your phone or online on your personal computer, within the comfort of your home, without the hassle of waiting on the phone or pre-scheduling any appointments to speak to a financial adviser and being matched to an investment product and type nearly instantly? Better yet, imagine these services providing you with benefits you may not otherwise find or qualify for: lower fees, lower minimum initial investment requirements using algorithms that haven’t failed yet?!

For many investors, this dream is now a reality thanks to robo-advisers. And with the assets being managed by robo-advisers rapidly increasing and their growing popularity, consumers are bound to encounter (either willingly or by happenstance) some type of robo-advisory service in the future.

The process looks something like this: a website or mobile app asks you a set of questions, the website or app then collects the answers and processes that data and then uses algorithms to recommend stocks and manage portfolios. In essence, the robo-adviser will give you investment advice about the product it believes is right for you.

While there is no standard definition, the two largest and most important regulatory bodies, FINRA (Financial Industry Regulatory Authority) and SEC (U.S. Securities and Exchange Commission) view and define robo-advisers in the following way:

  • FINRA’s Definition

According to FINRA, the term “robo advisors” or “robos” refers to the digital [investment] advice tools that financial professionals use. FINRA separates these tools into two categories:

  • Financial professional-facing tools – tools that firms’ financial professionals use to manage client accounts
  • Client-facing tools – tools that clients use to manage to manage their accounts

According to FINRA, FINRA’s use of the term “robo advisors” or “robos” refers to the second category, client-facing tools. These tools provide clients with either some or all of the following six services: customer profiling, asset allocation, portfolio selection, trade execution, portfolio rebalancing, tax-loss harvesting.

  • SEC’s Definition

The SEC’s description mirrors FINRA’s broad description – the SEC refers to robo-advisers as “automated investment tools” whereas FINRA refers to them as “digital [investment] advice tools.” The SEC also refers to them as “automated advisors.”

A Robo-adviser’s Many Other Names

Most commonly, these tools are referred to fairly similarly (with the possibility of spelling variations):

  • Robos
  • Robo-advisers (SEC)
  • Robo-advisors (Advicent)

However, some terms used to describe robo-advisory services may not be as obvious. Depending on the industries, the business model, and the scope of services the robo-adviser provides, it may also be known as: