Observe families at restaurants these days and you’ll see a common image – several heads bowed over individual electronic devices. Like it or not, this is how we communicate, do business and manage our lives. We all can trade our brokerage accounts with the click of a mouse or flick of a finger, so it’s only logical that digitally based investment advisory services will become an important part of financial services in the future. For now, searching the term “digital investment adviser” yields information about social media and electronic records storage – but not investment  advisory services. But try “robo-adviser;” and the results are different.

Robo-advisers are online platforms that invest individuals’ money for a low fee, typically in a range of 0.15% to 0.35% of assets under management (AUM). Traditional registered investment advisers (RIAs) charge 1% AUM, but this can be higher depending on the level of services provided and planning involved. Robo-advisers also promise equal or better performance than traditional RIAs. The robo-advisers automatically invest client money in diversified investment strategies, using sliders for goals and risk tolerance, and then investing in ETFs according to what the algorithms and calculators decide is the best risk/reward profile for the customer.

An InvestmentNews special report captures numerous aspects of the business quite well.

As you can imagine, numerous compliance and regulatory issues arise from this business model. The most obvious is what steps the robo-adviser takes to truly “know the customer.” It is currently an open issue as to whether the electronic exchange of financial information is sufficient to meet the standard. Some robo-advisers have a staff of advisers who try to meet with individuals as accounts are opened or at review time while the “robo” activities only involve the implementation of investment strategies. But these companies look much more like traditional RIAs and their fees are in the 0.95% range.

Another significant issue involves whether the types of services provided by the robo-adviser are actually investment advisory services or if they are merely investment tools that operate like an online brokerage. As the SEC has pointed out in recent examination priorities communications, the issue of whether advisory services are needed and take place to justify a recurring AUM fee will be carefully examined. This could be problematic for the advisers who rely solely on electronic communications.

Finally, robo-advisers will need to have adequate systems to implement, and possibly monitor, the ongoing account review process and the information gathered and reviewed for this activity. Needless to say, compliance systems for robo-advisers will need to be robust.

The business desire to attract Millennial Generation clients combined with advances in technology lead to the inevitable conclusion that robo-advisers are here to stay and likely will provide important services either as investment platforms or directly to clients. Let’s see what happens next…