I’ve been a fan of robo-advisors, almost since their inception.  Most of them recommend portfolios of low management fee index funds in globally diversified portfolios.  Their advisory fees are low.

For investors starting out, or with uncomplicated financial needs, they can be an excellent alternative to traditional financial advisors.

Recently, I’ve seen some cracks in the robo-advisor façade.

Betterment fined 

Betterment is largest and best-known robo-advisor.  It was recently fined $400,000 by the Financial Industry Regulatory Authority for violating the customer protection rule and not properly maintaining its books and records.  It’s former president, Eli Broverman, was fined an additional $10,000.  Mr. Broverman is no longer at Betterment.

While regulatory lapses are always regrettable, investors shouldn’t overreact to this one.  It relates to activities from June 2012 and December 2014.  Since that date, Betterment has experienced no further deficiencies.

Wealthfront strays

 Wealthfront is also a major player, and an early entrant, in the robo-advisor space.  Originally, it adhered to a simple strategy of investing in low-cost exchange-traded funds that tracked the market and guided its clients into an appropriate asset allocation.

Recently it strayed from this tried-and-true approach and added a “risk parity” fund that’s automatically included in taxable accounts with more than $100,000 unless the client opts out. This fund utilizes a strategy often associated with hedge funds. It adds unnecessary complexity to investors' portfolios with uncertain benefits.

I’m troubled by this shift in style.

An industry in flux

Independent robos face stiff competition from competitors with far more resources (like Schwab and Vanguard) who have responded with robos of their own.  It’s likely more independent robos will be acquired and some will go out of business.

Clearly, the industry is in flux.

I’m not suggesting you abandon robo-advisors, but you should be aware of these issues.

Resource of the week

This article in FinancialPlanning discusses Wealthfront’s risk parity fund and the general state of the robo-advisor industry.

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