posted on December 2nd 2016 in Fort Worth CFP Team Posts with 0 Comments /

Are trading robots worth a look?

I’ve heard there are “robots” that can trade options for me with incredible accuracy. What do you think about that?  

Let me guess, they promise very high accuracy and probably trade “binary options,” right?  Unfortunately, this is a hotbed for scams. I’m going to hit the main point quickly, but for those interested in learning more about investment scams and how to protect themselves, I’m going to go into greater detail.

Should I consider “binary” options?

“Binary,” or “all or nothing” options, are not the same as the regular old options you are probably used to hearing about. We do not use binary options as part of our trading strategy. Be careful that you do not assume that all options are binary options. Binary options have been around less than a decade and are for most purposes a gamble–not an investment. There are only a couple of legitimate binary options traded that are regulated. Generally unregulated, the SEC (the Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission) have issued warnings about binary options, their fraudulent promotions, and their platforms. No regulation means there is no third-party monitor to ensure fairness, that client money is not kept in trust, and that manipulations are occurring. And just because something says it is “regulated,” be careful! Binary options have often been “regulated” by lottery and gaming authorities in obscure foreign countries!

Now, I’ll stay on the theme of robots, but this advice is really applicable to lots of investment- related decisions.

First, how do you know the claim is legit? Do they owe you a fiduciary duty in reporting? Whose standards do they abide by, and who has the right to check them out?*

Second, who is behind the robot? There are tons of them on the market, and many of them are run out of shell companies that are owned by just a few offshore companies.  Smell a little fishy? Sometimes there isn’t actually a broker at all! The customer is actually betting against the house, or a “bucket shop.”

Third, accuracy is way more complicated than saying “90% success rate.” Why? Because streaks matter a lot. In fact, they could trade at 100% success for a while, then a short streak of 50% success could wipe out the account! But when you average out the success of all the trades, the accuracy rate still comes out to 90%. During a period of 100 trades, they could have a streak of 50 winners, then a streak of 10 losers, then a streak of 40 winners.  

Basically, they overblow the importance of trade accuracy. Which would you rather have? A 50% accuracy rate when the winners average a 5% GAIN and the losers average a 2% LOSS, or a 90% accuracy rate when the winners average a 5% GAIN and the losers average a 50% LOSS? I’m not saying accuracy isn’t important, but it can distract you from the bottom line.

Fourth, who is the broker you have to set an account up with? A lot of these robots are known for working with brokers who have a bad reputation or are even unlicensed. Have you ever even heard of the broker? Where are they domiciled? If something goes wrong, what recourse do you have it? Again, does the broker or the robot owe you a fiduciary duty?

Fifth, maybe you think you are safe if you just go read some online reviews. Unfortunately, reviews are easy to fake–ridiculously easy. Also, those sites are almost always biased. In fact, regulators from around the world have issued warnings about many review sites themselves, which are either paid by the services they recommend or owned by them!  What I’m telling you is that one offshore company can own a bunch of companies with totally different names that appear to be competitors. The parent company then starts a “reviews” website on which the companies they own all happen to rank very well!  

That’s not all. As these services have become more well known for being scams, the scammers have gotten smarter! For example, they even set up sites that claim to call out scammers! That means people who are specifically trying not to get scammed end up on their site, being directed to the very scams they are trying to avoid! Don’t expect the fact that it is a scam to be obvious. In fact, scammer sites often give lots of very good advice and accurate information–part of the time. This builds trust to open the door for the scam!

I know what you are thinking: “How can they do this?!” The answer is that it’s a lot easier to get away with a lot when you don’t have a duty to disclose to any regulatory organization, don’t take a fiduciary responsibility, are based in a foreign country or generally don’t have any oversight. Remember, the parent company may be foreign but be operating through domestic “shell” companies that are expendable to the parent. Also, technically it’s not illegal to own multiple companies, but doing so can create a conflict of interest.

The bottom line is that you can’t trust reviews and testimonials anymore–period. Testimonials are especially suspect because they are so easy to fake; you have no idea who is on the other end of it. Another big problem is that people don’t review the characteristics they are supposed to review, or don’t even leave the review for the right company! For example, a person might have a wonderful experience with a physician, then encounter a billing issue with the insurance company afterward and consequently leave negative feedback for the doctor! Or a person might go to a car lot and have a fabulous experience overall, but the dealership rejects the person’s attempt to negotiate the price. The person can then go write a negative review about the dealership when all the dealership did “wrong” was not meet their price demand.  

Studies show that 23% of people complain purely out of vengeance for not getting what they want! Further, those who have a bad experience are 52% more likely to complete a review online than those who have a good one!  Also, any professional understands that there are people who are literally impossible to please and had a high likelihood to complain from the start! Those “statistical anomalies” are the most likely to review things.  Therefore, we should expect any legitimate reviews to be negatively skewed even for the best firms! If there isn’t negative skew, I’m suspicious!  

Reputable sources (like the SEC) don’t recommend anyone and they highly discourage testimonials in any marketing. Unlike the overwhelming majority of brokers and advisors who do not owe their clients a fiduciary duty, a fiduciary advisor must resist the urge to use testimonials, lest he be accused of “cherry-picking” his best examples to show prospects.

Sixth, maybe you think you are safe because you saw an ad on a “reputable” website. Nope, still not safe. Lots of websites don’t have any control over the ads that appear on them and state in the fine print that they accept no responsibility for them.  Even the ones who do have control don’t owe you any duty to check them out. They care about selling ad-space, not giving investment advice. The WorthPointe website has plenty of web traffic, but we don’t sell ad space. Think about that for a minute. Anyone with a fiduciary duty is going to be incredibly careful about what they put on their site, lest anything be construed as an endorsement. We forego that potential revenue to make sure our revenue only comes from our clients–meaning we only work for them.

In summary, here are a few things to remember:

  • Scams are hard to spot. Don’t trust testimonials you read online, especially if they seem especially favorable. You should always expect negative skew in online reviews. I’m not saying the negative reviews are reliable, but they should be there!
  • Don’t trust anyone who wants to introduce you to someone as a reference or show you the account statement of a client to gain your trust. You have no way of knowing if the reference is getting a kickback. Assuming the statement isn’t a forgery, you still have no guarantee it represents typical client results, or simply a favorable anomaly.
  • Terms like “accuracy” seem appealing, but can be all smoke and mirrors.
  • The best place to start when investigating any advisory-type relationship is to find out if the advisor, or “robot” in this instance, owes you a fiduciary duty at all times.
  • Make sure any investment fits into your plan. My role at WorthPointe is to concentrate on investing, trading and risk management, but my partners who are Certified Financial Planners™ (CFP® professionals) add additional expertise that helps our clients understand what investments fit into their plan. Teams work best when we all understand our role and commit to it.

*WorthPointe is a fee-only Registered Investment Advisor that is registered with the SEC, domiciled in the United States and headquartered in Austin, TX. We are 100% owned by our partners. We owe our clients a fiduciary duty at all times. All our trading is executed on regulated exchanges, and all our client assets are held in trust at registered and regulated third-party custodian/brokers who are also domiciled in the United States. SEC Registration does not imply SEC endorsement. The SEC does not endorse advisors.

about the author: Joshua I. Wilson CMT

Josh-Wilson CMTJoshua I. Wilson, CMT®, AIF® is a partner and wealth manager who has managed over $2B for TD Ameritrade. Joshua led the national training and development program for all of TDA’s new advisors and managers, won a national coaching award. Joshua gave his graduation speech at Brown University. Joshua is a Chartered Market Technician® (CMT®) and a Accredited Investment Fiduciary® (AIF®).

Learn more and/or Contact Joshua

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