By Kelly Robinson, Fall 2015 Student Intern
With today’s technology, almost everything is automated from our homes to our radio stations. With a few keystrokes and the click of a mouse, an algorithm can produce whatever it is you are seeking. While automation is great for music delivery systems such as the music app Pandora, it can be extremely risky when it is used as a tool to formulate investments, especially for the beginning investor. Today we will share information based on a FINRA Investor Alert to help protect against the hidden dangers you may encounter when using an automated investment tool, so you know how to protect yourself and your money.
The first danger of automation, is that it’s, well, automated. It works by asking you a series of questions, starting off with the most basic, focusing on your income, age, and basic assets. From there, the program will ask you more detailed questions, such as how much money you have to invest, your risk tolerance, expected rate of return, etc. The way you answer these questions directly impacts the investments the tool will recommend for you. This can be dangerous, because the questions are sometimes ambiguous and misleading. Much of the time, the questions are designed in a way to fit you into preset options (of which you are likely unaware) which may preclude you from investing in better opportunities because of your “wrong” answer.
Another danger with automated tools are that they tend to be inflexible. The algorithm may be written in such a way that it does not consider changing market conditions. Additionally, they do not consider the impact of personal goals which affect finances, such as having children and buying a home. This can be especially dangerous when the tool has estimated a specific time horizon for your investments, where you may face heavy losses if you have to liquidate prior to the predicted horizon.
Lastly, you may be opening your personal information to the world. While many of the sites and tools that exist today have elaborate security systems in place to prevent against phishing scams and fraud, the fact remains that you are putting your personal and financial information into a form on a website. Even with all the security systems out there, if you use an unsecured network or use a shared computer, your information is easily accessible by hackers. Furthermore, hackers go to extreme lengths to make fake websites that look authentic to even the most computer-savvy; something as small as missing the difference between https and http in the address bar (https is secure) can open an investor to financial scams.
The key to keeping your money safe is to be diligent and ask questions. Many of the sites and tools have numbers you can call if you have questions about the way a question is worded or about any of the fees and commissions associated with potential purchases. Furthermore, there are plenty of sites and articles that can alert you to specific issues. For more on today’s topic, check out FINRA’s full alert here.