When I think of Robo-advisor, why do I think of the robot from Lost in Space?
Seriously Robo-advisors are going to be a big deal in the retirement and non-retirement business. With anything new that enters the retirement plan business that offer some technological breakthrough, there are going to be hiccups. I can’t forget when the third party administrator (TPA) I was working with started a website where participants could check their account balance. It was a great thing for the 90 minutes a day it actually worked. They called the website SmartPlan and every other irate plan participant who called the helpline would call the website DumbPlan or StupidPlan or things not appropriate to print.
Robo-advisors that can properly give guidance to plan sponsors and plan participants are going to be a great thing until it’s not. What I’m saying is that the robo-advisor is only as good as the technology behind it. It’s not human and its limitations are going to be based on the way it’s programmed. It will make mistakes and it will cause plan participants to lose money and cause headaches when the markets go south. Remember the yelling about Target Date Funds and the varying levels of equities funds had across the industry for a target date of 2015? Target Date Funds were the greatest thing since sliced bread until it was tested in a bad market and it didn’t do so well for those ready to retire.
With the fiduciary rule, expect many broker-dealers will exit the commission model and offer robo-advisors to IRAs and retirement plans. How do I know? Merill Lynch cited they’d do that with the IRAs.
I’m not suggesting that robo-advisors are a bad thing, I’m suggesting that everyone is pushing something in this business without knowing what the downfalls of using such technology will be. The Department of Labor seems to think this robo thing is good for the business, I’m wary that something is going to drop when the markets tank.