Published on October 17th, 2017 | by Guest


How Badly Could Automation Hit the Investment Industry?

Automation — the boogeyman of the modern age. Advances in technology have always been somewhat disruptive. Reducing the need for a certain kind of worker through automation has usually created new industries, with new (and better) jobs to make up for it. Increasing human output and improving the quality of work and life has been the net result of automation in the past. Today, there is a lot of concern that the nature of automation is changing.

The big concern with software automation is that we’re not creating new jobs and new industries quickly enough to compensate for losses to automated tools. And, when those jobs are created, they’re not exactly stable. A great example of this is Uber. Despite being embraced as an alternative method of income by many people, Uber is hastening to develop autonomous vehicle technology. Implementing this tech would effectively put their own drivers out of work.

That doesn’t mean everything is doom and gloom. The potential that automation brings is already benefitting a number of industries. Marketing automation, for example, gives small businesses access to the kinds of data analysis that they normally wouldn’t be able to afford. New kinds of automation, better data analysis, and the demand for software-as-a-service are driving tech hubs and startup industries across the United States.

Advances in machine learning and automation have enabled us to do some amazing things, but there is definitely a flipside that some industries worry about. There is some concern among financial advisers that a combination of technology and unclear legislation may drive customers to automated services that aren’t themselves governed by current ethics regulation.

The Fiduciary Rule and Robo-Advisers

The fiduciary rule is a standard of ethics that applies to anyone selling retirement-related investment products. Put simply, it requires advisers to act in the best interests of the client when suggesting certain products. Its main purpose is to protect consumers from conflicts of interest. For example, an adviser has identified two products that are suitable for a client. They get a commission on one of those products, but not the other. The fiduciary rule would require them to present both products and disclose the financial relationship.

This rule is, basically, good. It protects consumers and ensures that advisers as a whole maintain a trustworthy status among their clients. The problem is that it’s unclear whether, and how, the fiduciary rule will affect robo-advisers.

Robo-advisers are capable of automatically managing investment accounts. They can perform a number of complex investment tasks and are getting better at managing portfolios. They’re also being implemented as full-service advisers, capable of recommending products based on a client’s needs and handling portfolios without human intervention.

This is where problems can potentially occur. Robo-advisers are cheap. Likely much cheaper than real advisers who, in order to keep up with ethical standards, are likely to abandon commission payment models. Again, on the surface, this is arguably a good thing, because even though the clients will be paying higher fees, they’ll be getting better service. Higher fees for human advisers, however, encourages people to switch to cheaper robo-advisers.

With less regulation, those automated options are not necessarily unbiased. Robo-advisers for banks, for example, have been the center of some controversy in the news. There’s a lot of potential for manipulation. For example, bots may only recommend bank-preferred products that pay extra for placement in the system.

On the Other Hand, Automation Is Improving Investment Markets

The good news all around is that automated tools have the potential to change the game for a number of investment types. The transparency and security offered by blockchain services, for example, have a number of implications for real estate technology. An improved ability to gather and analyze data and the tools to automate those processes increases the attractiveness of investment and boosts the health of that particular market.

But With Automation Comes Security Risk

The implementation of new technology can often come with unforeseen security risks. It’s been a rough year for cybersecurity breaches. The IoT contributed to cyberattacks by adding more points of contact and potential breach into previously secure systems.

Similar worries can crop up with robo-advisors, especially with the Equifax breach so fresh in the public’s mind. The fact is that no security is 100 percent foolproof, but security is a big priority for financial services providers. Robo-advisers often have some of the best security available, on par with banks, so it may not be fair to say that there is, necessarily, a larger risk of breach. At least, not on the service provider’s end. The problem comes from the fact that people are interacting with these automated servers from their personal devices. If you log in using a compromised account or device, someone could do a lot of damage to your finances.

The thing is, good security sometimes isn’t enough. Some of the most secure systems can be, and have been breached. The big risk in transitioning to automated financial services isn’t necessarily in the opportunities for breaches to occur, but in the damage that can be done when one does occur. The Equifax debacle added to this worry by demonstrating that consumers might not be informed for months if their financial data has been compromised.


Despite the potential issues and conflicts of interest, automation is not inherently bad for consumers or financial advisers.

The issue comes from the fact that legislation, especially concerning ethics and security, is often too slow to catch up to new technology. The more disruptive that technology is, the greater potential for unforeseen problems. It’s important to encourage technology literacy in lawmakers, so that we can ensure that the ethical standards we hold humans to don’t become lax where automated services are concerned.

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