(Bloomberg Business) — You're sitting down with your financial advisor and looking her right in the eye. Is she advising you? Or selling you?
Some financial advisors, like doctors and lawyers, have a legal duty to put their clients' interests' first. Others are free to sell expensive funds or complicated annuities with hidden fees.
And then there are the robots.
"Robo-advisors" are computer programs that ask you questions online and set up a portfolio for you. And, unlike many in the investment industry, they are fiduciaries, with a legal obligation to put clients' interests first.
Robo-advisors have been winning attention, and assets. Two of them, Wealthfront and Betterment, have attracted more than $2 billion each in client money in the last few years. Their algorithms can automatically put people in low-cost exchange- traded funds, regularly rebalance portfolios, and look for tax savings.
Others, such as Financial Guard and Personal Capital, help investors easily view and evaluate all their investment accounts, including 401(k)s and IRAs. Along with the startups, heavyweight money managers are launching robo-advisor services. Charles Schwab started its own offering in March and already is managing about $3 billion. That's a tiny share of the industry but signals investors' interest in the trend.
As more people turn to robo-advisors, the software has become ammunition in a fierce fight over what advisors owe their clients. The Obama administration wants all advisors handling retirementaccounts to promise to put their clients' interests first. It proposed a rule in April to force those advisors to make that promise. The investment industry and its allies in Congress say the rule would subject millions of middle-class investors to higher costs.
But robo-advisors can serve small investment accounts for a fraction of the price of human advisors, while already complying with the stricter rules. Secretary of Labor Thomas Perez repeatedly pointed to Wealthfront, which launched in 2011, while testifying to Congress last week.
"Wealthfront is living proof that not only is it possible to provide fiduciary service at low cost to small investors nationwide, but that the market rewards these efforts," Perez said. Wealthfront charges nothing on the first $10,000 invested and a fee of 0.25 percent per year on anything above that.
