Robo-advice conflicts

Bloomberg ran a story this week about conflicts of interest in the robo-advice world with a few choice digs:

Some of the big banks’ new algorithmic programs may favor funds from companies that pay the banks millions of dollars for access to their wealthy 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. It includes sponsoring conferences for bank employees at luxury resorts and lavishing top brokers with gifts and entertainment.

Basically it boils down to this: a bunch of banks who are used to getting kickbacks in their existing business have created robo-advice platforms and still want kickbacks.

It’s a good reminder that in financial services there is no product wholesome enough that it can’t be corrupted.

There are some good ETFs out there with low fees and prudent structures. There are also a second generation of ETFs trading off the generally good name of ETFs with massive fees, synthetic underlying assets, leverage and potentially significant liquidity issues.

There are also good robo-advisors who are trying to give investors low-cost vanilla asset allocation. Here comes the second generation of robo-advice looking to trade off the good name of the first generation.

Shameless plug: What we are trying to do at Nucleus Wealth is avoid these conflicts by owning underlying securities wherever possible (and avoid the second layer of fees). In the Foundation portfolio, we do own ETFs (for international stocks as the balances are too small for direct share ownership) but we do not receive any payments, lunches, box seats at the footy, “training” courses at 5-star hotels or otherwise. In my experience, it’s a slippery slope that is best avoided altogether. We are also not robo-advice. We are running active asset allocation – i.e. we are choosing to be overweight international stocks at this point in the cycle rather than taking a neutral position as most robo-advisors will do.

Damien Klassen is Chief Investment Officer at Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.