Turning your investment money over to a robot, with its almost infinite data base, may lead you to believe the advice you receive is objective. (Blog 4/15/15) Why shouldn’t it be? Robots have no personal interest at stake. An added plus is no middle man fees.
Banks understand the appeal. Giants like Morgan Stanley, Wells Fargo and Bank of America now offer robot advice as an option to their clients.
Of course, where humans can tinker, they do. My dad taught me that. No electric gadget entered our house without being disassembled and a gasket or bolt added to improve its function. So, it would follow as the night the day that robot-advisers are not immune from tampering.
Hugh Son confirms that opinion. Banks can program robots to make specific sets of recommendations. They do so under a program call “revenue sharing.” (“Robot Advisers Can Be Conflicted, Too,” by Hugh Son, Bloomberg Businessweek, July 31, 2017, pgs. 28-29.) It means companies pay banks to program robots to recommend their investment products. The fee can run as high as $500,000 a year. Of course money doesn’t change hand directly. Payouts come as lavish gifts, prepaid conferences at luxurious resorts and other forms of entertainment. (Ibid pg. 29.)
One investment company stands out among the rest because it doesn’t pay to play: Vanguard. Morgan Stanley hasn’t taken the rejection lightly. It dropped Vanguard from its lineup of fund offerings, saying the bank’s clients showed little interest in them. Excuse me for laughing. Warren Buffet, one of the world’s richest men, advises his wife and everyone else to invest with Vanguard, a straight shooter known for its low fees. (Click)
Morgan Stanley blows off concerns about the conflict of interest revenue sharing poses. They insist their employees receive no extra compensation for the recommendations they make.
No doubt that’s true. A robot has no need for extra compensation. But machines programmed to select one company over another — one that pays to play over one that doesn’t? That reads like favoritism in my dictionary.