Robo-advisors’ conflicts of interest in the spotlight

By David Tuckwell on Wednesday 2 August 2017

Savings and Investment

Robo might not be as incorruptible as some thought

Robo-advice can be corrupt, just like personal advice. 

Financial advisors and banks are meant to provide fair and balanced investment advice to clients who then pay them for the service. But in practice many advisors provide biased advice, referring clients to products or funds managed by cronies who give them kickbacks for referring their “muppets”.  

Robo-advisors, which replace human advisors with computers, were meant to be incorruptible and not suffer the temptations of man. It was the great promise of robo that it would end the corruption and cronyism of personal financial advisors.

But according to a new article in Bloomberg robo-advice does anything but.

Citing “disclosures by the banks,” a new article suggests that robo-advisors run by major banks have been doing deals with ETF issuers and fund managers, offering them access to their rich clients if they pay for it.

In other words, big banks that are accustomed to getting kickbacks have established robo-advisors and still want the same kickbacks.

“The practice is known as revenue-sharing, or paying for shelf space. It includes sponsoring conferences for bank employees at luxury resorts and lavishing top brokers with gifts and entertainment,” the article says.

Banks have said that they’ll put policies in place to deal with the conflict of interest, but the experience of Vanguard suggests otherwise.

“Vanguard Group, whose popular low-cost ETFs are the main funds used by Wealthfront and Betterment, refuses to make such payments. Morgan Stanley in May dropped Vanguard from the lineup of funds its advisers offer... Many other asset managers, including BlackRock Inc. and Legg Mason Inc., choose to pay.” 

This article first appeared on www.roboadvicenews.com.

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