In part 2 of my review of Senator Elizabeth Warren’s letter to the DOL in support of the Fiduciary Rule, I want to look at the misplaced and erroneous trust placed in technology firms as options to replace human advice.
One reason that those in government love to meet with technology firms is that there is a new area some see an opportunity to control and benefit from. Whether or not that technology is actually helpful or harmful is a secondary concern.
Robo-advisor firms in the financial services today are playing by a different set of rules due to this connection. Many advertise tax schemes that CPAs and true fiduciaries would never claim have the same benefits that robo-advisors built their business benefits around. Meanwhile, they have worse technology and less personal advice in terms of actual tax and financial strategies, but are promoting and promoted for having the exact opposite!
California’s government loves technology so much that they have been planning a high-speed train project since the early 2000’s. I won’t dive deep into the details here, but the votes for the system have been close at every turn, while the public has not had accurate information on the costs, fees to ride, and the ability of the train to achieve the stated benefits.
A few common threads with many technology advancements that are pushed before their time.
Bureaucrats bemoan a ‘problem’ that the market has not solved on their time.
Benefits were exaggerated. The train will not achieve the speed and travel time that was promised, and many business taxpayers who were for the train may forgo it due to this failure.
Costs were underestimated by a multiple.
Meanwhile, Californians have been in a long drought and today is dealing with the failure of the largest damn threatening residents.
Many would suggest that the scarce resources of California taxpayers should have gone toward these problems.
We see the same in the DOL’s Fiduciary Rule.
Bureaucrats bemoan ‘conflicted advice’ that human advisors may give in order to receive compensation.
Benefits of robo-advisors are vastly exaggerated. Somehow they are seen as fiduciaries to Senator Warren when they are simply online trading platforms.
Costs of these programs in terms of opportunity cost with other advice options, with the losses that come with overmanaging assets, and by not being able to provide comprehensive advice can be staggering.
Online advisors do not meet any definition of a ‘fiduciary.’ Most offer cookie-cutter portfolio mixes – and strange ones at that – that do not incorporate all of the opportunities of an individual. Those that do offer impersonal advice, no where near what a human can provide in minutes.
One item that has always interested me is that although these firms claim to have been born out of the advancement of technology, my experience have been they provide a much weaker advisory and portfolio technology than traditional advisors. The main technology use they have promoted better than others has been a slick sales website. The back office operations of many of these firms I’ve experienced has been questionable, and I am often curious why established top-tier custodians have so many controls over regulatory factors, and these fly-by-night firms have yet to had a regulatory violation. I can not see their living up to ‘know your customer,’ Patriot Act, and other requirements based on my little knowledge of these things, and my interactions with these online firms.
I previously wrote about the myth of the $17B ‘cost’ to retirements that Senator Warren, and other proponents of the DOL’s rule repeat on a regular basis. There is a cost as well to firms that are allowed to play by different rules.
Most online advisors are simply platforms for individuals to have an automated trading service that they can control and, as we most often see with Investor Returns, this control comes with significant costs itself in terms of market-timing, a false sense of security that planning is met, and a poor and incomplete portfolio mix. Clients who work with humans can not simply change their investment mixes on a whim. A fiduciary would do more – including firing clients – who did not stick to the advice of the fiduciary.
We would be wise to not overly promote, and under regulate, new technology. Robo-advisors have many flaws, and just about all can be replaced at a much lower costing target date mutual fund for those who truly do not want to pay for quality advice.
Government is not a business owner, and should not pretend to be, since all they can do is transfer resources from services that consumers choose, to services they do not currently choose. All government should do is set an equal playing field, with no exemptions, no promotion of robo-firms, and no weakening of the fiduciary standard in order to advance their own pet projects and in effect pretend to be playing business owner.
(Economic lesson. Technology is useful, and it does change markets, services, and professions. What bureaucrats often ignore is that technology advances at its own pace. And, while it can assist with replacing labor, it often does not leap forward to being much more than an aid… and certainly not on most bureaucrats short-term preferences.)