[slg]

Count me as skeptical when it comes to all these robo-advisors.

The primary issue is the principal-agent problem [1]. You need to align the incentives of the financial advisor with the incentives of the client. There are a few ways to do that. One example is the fiduciary duty mentioned in the article that makes it a legal responsibility to act in the best interests of the client. Another option is to allow the customer to share in the profits of the advisor through some type of customer ownership like you see with companies like Vanguard or with credit unions.

VC funded robo-advisors like Wealthfront have no solution to this problem. In order for them to be trusted with full control of your money, they would have to be satisfied with growing their profit simply by increased customer base and not want to increase profit per customer. Publicly owned or privately owned VC backed companies simply don't work like that. There is a constant need to continually increase profits. It is just a matter of time until someone at robo-advisors says "we can make more money if we add this fee". And since they control all your finances already and you are apparently the type of person who doesn't want to think about or look at your finances, odds are you probably won't even notice the new fee. That is a recipe for obvious abuse.

https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...

[daxelrod]

> In order for them to be trusted with full control of your money, they would have to be satisfied with growing their profit simply by increased customer base and not want to increase profit per customer.

> It is just a matter of time until someone at robo-advisors says "we can make more money if we add this fee".

There are a number of options beyond fees that keep incentives aligned between advisor and client. For example:

1. The advisor grows the client's assets by investing them well (because the advisor's revenue is a portion of assets under management).

2. The advisor encourages the client to invest more. This could either be moving more of their portfolio to the advisor, or encouraging regular deposits (which is a valid investing strategy.)

[slg]

Option 1 doesn't do a good job of aligning incentives because you are taking a small percentage of a small percentage. The article says Wealthfront charges 0.25%. Let's use 5% as the difference between a good and bad investment (this is an arbitrary but I believe realistic number). This means the difference between Wealthfront doing a good job and a bad job for the customer is the equivalent of them increasing their fee 0.0125%. That is a $1.25 increase per $10,000 invested. So what is the better bath to increase profits, doing a fantastic job of investing, which likely comes with increased expenses, or increase your fee some tiny percentage that will almost surely go unnoticed by the customer?

Option 2 is moot for the authors example since they suggest these companies manage everything and therefore a customer can't give the advisor more to manage.