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Roboadvisors: Friend or Foe?

Algorithmic trading platforms, or roboadvisors, are already managing nearly $1 trillion in wealth across the United States. In 2014 it was predicted that third generation roboadvisors would finally be sophisticated enough to take over for single-family offices. As you can imagine, this has not been the case, since it’s unlikely any algorithmic platform could ever master the complex layers involved in ultra-high-net-worth financial planning. 

Roboadvisors can, however, offer benefits to family offices. Are they something your own family office can use?

A Role for Robos


In fact, there are three major ways roboadvisor platforms could potentially be beneficial to your family office. First, automated rebalancing can help maintain target asset allocation on some of your simpler accounts. Rather than having an advisor take the time to review and rebalance accounts regularly, you can realign many of your accounts using a robo at scheduled intervals. This could even allow you to rebalance on a more frequent basis. 

A second benefit is that some robo platforms can automate tax-loss harvesting. When using them for this purpose, it’s critical to ensure the platform also has a mechanism to prevent wash sales. 

The third benefit to having a roboadvisor is to manage smaller accounts in the collective portfolio, especially those with simplified investing goals. Whether it’s custodial, charitable, a trust or an IRA for a newly hired family member, allowing small balance accounts to be effectively managed by a roboadvisor platform saves human resource time for larger, more complex accounts. 

Problems With Robos

Family offices are exempt from the Investment Advisers Act, but that has recently been under review. With the SEC likely exploring how well roboadvisors satisfy the requirements of the Investment Advisers Act and fiduciary standard, it might muddy the waters if a family office uses a robo platform as a tool. 

Another potential issue with roboadvisors is that your office needs detailed, organized data collection and dissemination to use them effectively. To integrate the robo, your office needs strong back-office accounting and reporting systems that can quickly create customized reports to monitor the robo performance and ensure the right data is fed into the platform. 

Finally, roboadvisors will probably never gain the sophistication necessary to completely replace human advisors, especially for multifaceted, ultra-high-net-worth clients who need a family office. The ways a robo advisor can help are extremely limited, and there are likely much more effective ways to digitize your office.

Roboadvisor platforms are probably not your enemy, and they can be welcome as part of the family office’s overall strategy. The goal is to set clear boundaries around what the robo can effectively handle so that you get the most out of this technology without expecting it to be capable of more than it is.

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