Wisconsin Investor Awareness Alert: Robo-advisers

Investors are increasingly turning to robo-advisers to help them manage their investment portfolios. The term “robo-adviser” refers to electronic platforms that provide automated investment advisory services to customers utilizing computer algorithms developed by the platform’s sponsors. The ability to easily access robo-advisers via smartphone apps and online portals is contributing to their increasing popularity. The automated nature of the model often means robo-advisers may offer their services at a comparatively lower cost.

“If Wisconsin investors are considering a robo-adviser, they should be sure to examine all available information to make sure they understand the risks and benefits provided by this type of advice,” said Kathy Blumenfeld, DFI Secretary-designee of the Department of Financial Institutions.  “They should make certain that it is appropriate for their short- and long-term needs.”

There are two general robo-advisory models. The ‘pure’ model is entirely automated with little-to-no ability for customers to receive personalized investment advice from a financial-services professional. A second model is a hybrid robo-adviser, which adds a level of human interaction – generally at a higher cost – allowing customers to work with a financial-services professional online or in person.

For information on who this model may serve and what things to consider before investing, the full advisory with further details are available below, on DFI’s website and from the North American Securities Administration Association here.

Robo-advisers are relatively new to the investing landscape but, like other advisers, they must be registered to offer investment advice. Before making any financial decisions following traditional or new models, ask questions and do your homework. To check the registration status of a securities firm or salesperson, call the Department of Financial Institutions’ Division of Securities at (608) 266-2139, Monday through Friday between 8 a.m. and 4:30 p.m.

Things to Consider when Investing With a Robo-Adviser

Even though robo-advisers offer a service that allows you to take a more passive approach to investing, you should continue to monitor and adjust your portfolio according to your needs. Handing off your investments to a robo-adviser and putting them on autopilot may yield unexpected or undesirable results. It is also important in selecting a robo-adviser to consider the extent to which you will need personalized investment advice or interactions with a financial services professional.

Before you choose to use a robo-adviser, reflect on these questions:

  • Does the robo-adviser build a portfolio based on your financial goals while taking into account your appetite for risk? When you invest, you should always keep track of your investments and ensure your portfolio meets your long- and short-term needs.
  • Are you comfortable and familiar with the types of investment products the robo-adviser will use to build your portfolio? Research and understand the investment products the robo-adviser you are considering uses before you invest.
  • Do you like discussing ideas or asking questions when seeking financial advice? If so, be sure you understand the level of human interaction you will get with the robo-adviser you are planning to use.
  • Do you want the ability to make decisions based on market fluctuations? With robo-advisers, you may not have the ability to buy and sell securities in your account as the market moves up or down.
  • Are you considering any tax consequences that you may encounter for investment losses and/or gains? When investing, you should consider your yearly tax situation. You may want to talk to a tax consultant to better understand how using a robo-adviser may affect you.
  • Are you comfortable and familiar with the robo-adviser’s fee structure and compensation model? You should know how much you are paying for the robo-adviser’s services and how these costs will affect your returns over time.

How to Protect and Inform Yourself

  • Check Registration. Firms that provide advisory services in the U.S. are typically registered with the Securities and Exchange Commission (SEC) or one or more state securities regulators. In Canada, robo-advisers must be registered with the securities regulators in the provinces it operates in. Check the SEC’s Investment Adviser Public Disclosure database or FINRA’s BrokerCheck. In Canada, use the National Registration Search.
  • Check Disciplinary History. Robo-adviser firms in the U.S. and Canada must comply with the laws of the jurisdiction they are operating in. Take a look at the firm you are considering to see if it has been subject to any disciplinary action.
  • Research the Company and its Management. Look at the background and experience of the firm’s leadership. Be sure you are comfortable with the people guiding the investment and business strategy of the firm you are considering. You also may find news on a variety of topics such as its overall business strategy, management interviews, operational matters, or customer complaints.
  • Read Online Customer Reviews. Online reviews will give you a sense of pros and cons of the service. You can get a feel for current or former clients’ satisfaction with the firm you are considering and the services it provides. Understand, however, that portfolio performance is unique to every individual.

The Bottom Line

Robo-advisers are relatively new to the investing landscape. As with any new service, you should thoroughly investigate to make sure they are right for your investment needs. Before making any financial decisions, ask questions and do your homework. For more information, contact your state or provincial regulator. Contact information is available on the NASAA website, here.