Turns Out Robot Financial Advisers Can Have Biases Too

Especially when revenue-sharing is involved.

Today in “how our artificial intelligences get that intelligence,” we go to Bloomberg Businessweek:

Your Robo-Adviser May Have a Conflict of Interest

Bloomberg looks into whether “robo-advisers,” which is to say those apps and software programs that promise to invest our money better than we could on our own, are secretly stanning for certain funds:

But it turns out that even software-based financial advisers can have conflicts of interest. Banks still employ armies of advisers and get payments from fund companies that want access to those advisers’ clients. There’s a risk that the banks’ robo programs could favor mutual funds and exchange-traded funds from companies that make such payments, according to disclosures by the banks.

The practice is known as revenue-sharing, or paying for shelf space.

So are our robot advisers biased? The banks aren’t giving out a clear answer. As Bloomberg explains, companies like Morgan Stanley and Bank of America acknowledge that there could be conflicts of interest but they’re taking steps to mitigate them.

I know absolutely nothing about investment apps, but I do know that a team of people have to program the app’s decision-making process… or, at least, I think I know that. That’s how it works, right?

But if the bank or brokerage already has conflicts of interest built in, those conflicts might get programmed into their robots as well.

Brokerages building robo-services are piggybacking off their existing infrastructure, says Kendra Thompson, a managing director at consulting company Accenture Plc.

I wonder what it would take to hold robo-advisers to a fiduciary standard. Turns out that the SEC is working on that:

SEC provides robo-adviser guidance

Federal securities regulators warned robo-advisers to be overtly clear with the public about how their algorithms recommend portfolios and asked them to consider whether their questionnaires really ask for enough information to give advice that’s in clients’ best interests.

In theory, robo-advisers should be fiduciaries. As the Wall Street Journal notes, many robo-advisers are “legally bound” to be fiduciaries based on their status as registered investment advisers.

Fiduciary Care From a Robo Adviser?

In practice… well, we’ll see.

Support The Billfold

The Billfold continues to exist thanks to support from our readers. Help us continue to do our work by making a monthly pledge on Patreon or a one-time-only contribution through PayPal.