Robot Advisers Can Be Conflicted, Too

Brokers shift to online advice, but fund companies still pay for advisers to go on junkets

- Hugh Son

Robo-advisers offer the promise of impartial investment guidance, but the newest ones may not be totally immune from Wall Street’s ways. Wealth management units at big U.S. banks including Morgan Stanley and Bank of America Corp. have rushed to build so-called robo-adviser services. The products, which were pioneered by online upstarts Wealthfront Inc. and Betterment LLC, use algorithms to pick investments tailored to a customer’s appetite for risk. They cut out a lot of the costs of working with flesh-and-blood financial advisers, and, it would seem, some of their biases.

But it turns out that even software-based financial advisers can have conflicts of interest. Banks still employ armies of advisers and get payments from fund companies that want access to those advisers’ 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.