What is a robo-advisor? How to report on this personal finance trend
By Molly McCluskey
A robo-advisor is a digital tool that relies on algorithms to automate and manage investment portfolios. It’s widely offered through large, traditional brokerage firms like Fidelity, Vanguard, Charles Schwab and others, as well as smaller, fin-tech firms like SoFi, SigFig, Ellevest and more. Many robo-advising accounts require a lower minimum opening balance than accounts managed directly by a financial advisor, and offer a more accessible investing option for beginning or lower-income investors.
“Robo-advising is really good especially for smaller portfolios and younger people because it’s easy to understand,” said Skip Elliott, the former founder and president of Elliott Financial Management, an investment advisor firm headquartered in Juneau, Alaska. “If you’re investing $25,000 or less, you typically can’t afford advisors.”
Investors opening an account with a robo-advisor typically answer a series of questions about their financial situation and goals, and receive investment advice. After the account is established, the investments will be fully automated, with adjustments made over time. Robo-advisors typically focus on passive investing through exchange-traded funds (ETFs) and mutual funds. It’s an approach that can appeal to people who don’t want to learn how to actively manage increasingly complex investments over their lifetime.
“People using a robo-advisor need to understand that if they’re investment brokers, or investment advisors,” Elliott said. “Advisors have a fiduciary responsibility to their clients. Brokers are salespeople.”
Unlike traditional brokerage accounts, robo-advisors may not offer access to a financial advisor and access to customer service may be limited, or nonexistent. The levels of service can vary depending on portfolio size.
Brokerage firms specifically differentiate their robo-advisors as a separate product, and clearly identify them among their offerings. Fidelity Go, for instance, is Fidelity Investments’ robo-advising platform; Vanguard offers its Digital Advisor, Schwab Intelligent Portfolios is Charles Schwab’s offering, and more.
“Robo-advisors are basically the same everywhere. It’s not like one brokerage house is going to have a significantly better algorithm than another” Elliott said. “When it gets weird is when the marketing people get a hold of it and say one robo-advisor is better than the other.”
While robo-advising platforms themselves may be nearly identical, they’re still used by financial companies with policies, minimum balances, and fees that can vary dramatically.
The Security and Exchange Commission (SEC) regulates robo-advisors, and has brought suits against brokerages for hiding robo-advisor fees from customers, as it did with Charles Schwab in 2022, and for breaching its fiduciary duties to clients, as it did against SoFi in 2021. Neither agreed to wrongdoing, but Charles Schwab agreed to pay a $187 million settlement. SoFi agreed to a cease-and-desist order, a censure, a penalty of $300,000, and “to perform certain undertakings”, ie., reform some of their business practices.
Potential coverage areas for journalists wanting to report on robo-advising include SEC violations and fines; new and emerging players on the market; how and whether new investors are increasingly using robo-advisors over traditional financial planners; the impact of using brokers over fiduciaries, and more. Contextually, a bank’s broader business ecosystem, SEC violations or legal issues should be included in any coverage of its robo-advisors.
“An algorithm can run a portfolio, but it’s not like there’s a computer running a business,” Elliott said. “There are humans running a business that uses technical tools. What are their ethics?”
Additional Resources
Molly McCluskey is an award-winning journalist who has written for The Atlantic, The Washington Post, Rolling Stone, New York Magazine, National Geographic and more. View her work and get in touch via mollyemccluskey.com.
Finance 411 is a bi-monthly feature, presented by RTDNA and the National Endowment for Financial Education.