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Posted by Corey F. Schechter | Mar 09, 2017 | 0 Comments

Individuals worried about robots taking over their lives may have to make a phone call to their wealth management provider to see if their accounts are being managed by a human being or a robo-adviser. Over the past decade, the use of robo-advisers in handling investments has grown substantially, and will likely continue to grow into the future.

In the past, wealth management was handled by human financial advisers. However, these human advisers often required substantial minimum investments and took a good-sized management fee for their work. As a result, wealth management was often limited to the wealthy. With the advent of the virtual financial adviser, small and medium wealth investors can now have their assets actively managed based on their financial goals.

Robo-advisers provide financial advice based on mathematical algorithms executed by software, without requiring active participation by human financial advisers. The software can automatically manage and allocate client assets based on their individual investments, risk preference, and return goals. While most types of investments are open to robo-advisers, the majority of funds are invested in index funds or ETFs.

There are now more than 100 robo-adviser services available in the U.S. and internationally, including Betterment, Wealthfront, Futureadvisor, and Vanguard. They may go by different names, including “automated investment advisers” or “digital investment advisers,” but together, these robo-advisers directly manage hundreds of billions of dollars in retirement plan assets.

Many robo-advisers are based on the same type of portfolio management software relied upon by human portfolio managers. However, robo-advisers have a more limited role than human financial advisers as human advisers often bundle other management services along with portfolio management. Human financial advisers can provide investment advice as well as advice about retirement planning, estate planning, and other forms of financial planning.

With robo-advisers, common investors have access to online portfolio management software. Many human advisers have a minimum investment amount of $50,000 or more, while robo-adviser services may be available with a minimum investment of only $500. Fees as a percentage of assets under management for robo-advisers are also lower than those for human advisers.

The growth in robo-advisers has been fueled by investors who may not have large amounts of cash ready to invest but are looking to make their modest investments grow. Many of the growing pool of users are younger investors who are more comfortable with online and software-based financial services.

As robo-advisers make further headway into the financial services industry, they may expand into other areas of investing. Last year, robo-adviser service Wealthfront entered into a partnership with the State of Nevada for individuals looking to put money away in a tax-advantaged 529 college savings plans.

However, it is also worth noting that this new rise in the use of robo-advisers has not been without legal challenge. The allegations most commonly seen in this new area of litigation involve excessive fees being paid by benefit plan participants for these robo-adviser services, as well as improper revenue sharing between companies providing robo-adviser services and benefit plan recordkeepers retaining these services.

Butterfield Schechter LLP is a San Diego County firm focusing its law practice on employee benefits, tax law, trusts and estates, and business counseling. Our firm can help you and your family identify tax-savings opportunities, avoid tax penalties, and plan for the future. Contact our office today with any questions on how we can help you and your family succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


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