Comparing Robo-Advisors

[shiny!]

There was some mention here recently about Robo-Advisors. There's Betterment, Wealthfront, FutureAdvisor, Schwab Intelligent Portfolio... I've been trying to make comparisons. Schwab charges lower service fees but the in-house funds they invest in have higher fees than the index funds the other services invest in. Schwab keeps more of clients' money in cash, which they say is recommended practice among portfolio managers but the other services say is a drag on growth.

Having dyscalculia, I can't make heads or tails of the math so I'd like to hear your opinions. Would you use one and if so, which one and why?

Here's some links to get the discussion started:

Top 10 Robo Advisors Ranked: Find the Best Automated Online Investing Services

Schwab Intelligent Portfolios Review

What Every Investor Should Know About Schwab’s “Free” New Advice Service

Schwab Intelligent Portfolios Review – Is Their Service Really Free?

Betterment-vs-Schwab

[jk]

Re: Comparing Robo-Advisors

you might want to check out this website. take a look at the various sample portfolios and their performance over time. play with the various calculators to see how different asset allocation might have worked. the data base there only goes back to 1972 because of the lack of data for various asset classes we now have available. thus the data include several market cycles but there are questions whether there are secular changes which would undermine those models' applicability to current markets.

just because a model works in backtesting doesn't mean it will work in a similar fashion going forward. also, you can read dispassionately that the maximum drawdown of some strategy might have been - say - 20%. it is different to live through such an event and have the stomach to stay with your strategy. make sure you can realistically live with the volatility of whatever course you choose. otherwise you will sell/liquidate your positions at exactly the wrong time.

none of these lazy portfolios account for how old you are, your risk tolerance, or non-investment options [e.g. especially annuities but also whether or how to carry debt, reverse mortgages, using money to somehow affect your future out-of-pocket expenses such as getting more effecient appliances]. depending on your total assets you might not want to invest any of it in order to have an adequate cash emergency fund.

the older you are the more you want to focus on minimizing drawdowns, because you have fewer years to recoup losses. also if you are making periodic withdrawals from your assets you face sequence of returns risk- which is kind of dollar cost averaging in reverse. if your assets diminish in value but you must nonetheless withdraw funds to pay expenses, you then have a smaller asset base on which to make [hoped for] future gains.

[GRG55]

Re: Comparing Robo-Advisors

This is the "retailing" of computerized algorithm based portfolios. What Blackstone pioneered in the institutional space. This growing retailing trend is something I have been pondering for a while now; mostly the consequences on the markets. I have a deepening conviction that as it becomes more widespread we may find markets increasingly volatile as the computers move masses of money into and out of the same holdings all together. I think we are already seeing the early signs of that. Stocks heading down just get devastated. Stocks heading up get bid into outer space as "everybody" (every computer) wants them.

In addition I seriously doubt each of these systems is proprietary, designed and supported internally by all these retail investing organizations - they have to be buying the core software from a very limited number of development vendors.

So I am starting to think as a small private investor there are only two contrarian strategies if one wished to continue to have equity and bond market exposure and outperform - try to anticipate what the computers might decide is "the next big thing" and get ahead of them. Alternatively, look for the devastated sectors that have been completely abandoned by the computers and find things to invest in with conviction among the ashes, e.g. become a deep value investor in a momentum world.

I am trying to do a bit of both right now, and perhaps the idea I have the most confidence in is a recovery in non-resource EM. There are numerous companies out there in that universe that are at or near my favourite marker of 7 & 7 (7 P/E & 7% dividend). This is where I was convinced the US markets would get to during the financial crisis, but it wasn't to be. Paulson's bazooka and the Fed rescued things before that happened. I have had to wait years but I think we are there in some locations of the world today.

[Chris]

Re: Comparing Robo-Advisors

I used to build these products for institutional clients at a large investment bank. One product (a global bond futures strategy) was so popular that there were several billion invested. Rebalancing the strategy was a complex operation because of the real risk of moving the market.

Another, of similar AUM, was run successfully for a number of years. As the performance faded, a quick analysis showed that it was during the rebalance period that most of the loses were occurring. Obviously a hedge fund (or a number of funds) had spotted the anomaly and exploited it. What was the result? A new version of the product that inversed the positions during the rebalancing and - hey presto! - a backtest showing excellent returns once more. Quick, fetch another wheelbarrow to transport the director's bonus!

[shiny!]

Re: Comparing Robo-Advisors

Interesting replies. Thanks, jk, for the link to those portfolio models.

All these algorithms that have to be gamed, it reminds me of SEO. Google comes up with a new, secret search algorithm and webmasters scramble to change their sites to appease the beast, only to have to do it again and again. Google says it's to improve "user experience" but in reality they've tilted their algos so far towards big companies, when you do a search for information you just get page after page of Amazon products. In the meantime, small shops can barely compete unless they become Amazon vendors.

Similarly with trading algorithms and computerized portfolios. High-frequency traders game the system so they always win and individual investors always lose. High-priced investment advisors with managed funds do a worse job for investors than simple no-load index funds. People are getting wise to that, leading to the rise of these computerized portfolios. But it hasn't taken long to figure out how to game them, too, and there's probably disaster in the making.

It didn't used to be this way. Aeons ago in the misty, prehistoric past you earned a paycheck, maybe had a pension. You bought a modest house, put money into your savings account every week where it actually earned interest. You bought Blue Chips to build a portfolio, raised your family, paid off your mortgage and retired with some dignity. At least that's the way my grandparents did it.

But ever since "they" replaced our real economy with this rigged, debt-based bubble economy, investing is more like gambling. Everyone who isn't smart enough to count cards loses their money to the house.

For five years I've been losing money when the market went up and losing more when the market went down. My conservative investment returns couldn't overcome all the fees. Last month I asked my financial advisor to move my remaining paper assets to cash, which he did. Then I compounded my sin by taking out some of that cash to buy PMs. This week he "fired" me as his client (but my PMs are looking good!)

So now I'm trying to learn about robo-managed computerized portfolios, see if that might be a better solution for me. But after reading this thread I just know I'll lose my shirt there, too. Why would I want to put my money into a rigged casino?

Gambling is against my religion. I'm not smart enough to count cards, anyway. The possibility of tiny returns if I'm lucky just isn't attractive when faced with the possibility of major losses at my age. More and more I feel like sitting with cash and PMs until all this cr*p topples down. Am I being stupid?

[touhy]

Re: Comparing Robo-Advisors

Ha Shiny...you just described me. Misery loves company, so let me share for you. I used to be a "buy and hold" guy and it did well for me for most of my life. In 2009 I was smart enough to buy the SPY at 700 or so, but having been hooked up by a friend to some new found doomer sites like zero hedge (and perhaps here at iTulip I am afraid to say) I sold out at about 1000. Since then it has been an investing life trapped in fear, frozen in place by analysis and anxiety, as I agonizingly watched my abandoned strategy earn 100%+ gains.

At present my asset allocation is approximately 20% gold and miners (wickedly painful over the last few years), 20% real estate, and 60% cash (some foreign currency (ouch!)). Also a little bit of venture capital too like Trutouch (which appears ready to disappoint).

Because I have come to recognize my fallibility and poorly wired investment personality programming I have a hope that robo investing with the Permanent portfolio or Golden Butterfly as described in JK's nice link might help take "me" (and my propensity for screw-ups) out of the equation. But even here I see it is impossible to delink myself from the program as I find it so hard to buy into unfavored assets (at least in my opinion) like equities. Starting this strategy has been scary thought when it appears almost every asset class is overvalued and bubblelicious given central bank policy. The dollar, bonds, equities....where would they be without central bank intervention and ZIRP? It doesn't matter much whether one is diversified if the majority of asset classes return to fair value after you buy them.

Ah well, now I have had my lost decade too just like Japan. Had I not taken counsel of my fears and stayed in the blue pill matrix of buy and hold....I would be a made man.

[BK]

Re: Comparing Robo-Advisors

Robo investing - is another illusion. Ultimately there is a human writing the code that determines the re-balancing. We live in an age when every one trusts the computer without considering the humans that built the machine. Very hard to believe that a computer system created by paid by the hour computer programmer can better manage money.
Managing a nest egg reminds me of every time I've worked at a startup. Many of the days you are at a startup you feel like you have made a mistake or at the very least your vision will never happen. Then when things look the worst the big day happens and you get acquired. But, there are also many times when a startup runs out of money. The great thing about running your own money is you can take a variety of approaches to your nest egg and have a few small home runs in your portfolio.
Sadly we are always looking for someone else to take the responsibility (I've struggled with this myself) and ultimately we need to learn to catch our own fish.

[DSpencer]

Re: Comparing Robo-Advisors

My thoughts:

As you may have seen in another thread, I use Betterment. It was very easy to set up, the interface is clean and simple. While you don't really control your portfolio, you can set your stock/bond allocation to adjust risk to some degree. The fee structure was better for me than Wealthfront because I have enough invested to get the lowest tier rate. So I am happy with it and believe that it represents a better option than what 90% or more of people do instead. However, at some point I may move the funds to my Vanguard account to cut fees even lower. I'm not willing to tax-loss harvest myself so I will probably try to see how much that feature benefits me before deciding.

I haven't looked deeply into Schwab's product. In reality I found most of them to be substantially identical in most regards. I chose mostly based on low fees. I also don't like the ridiculous clickbait style advertising that Wealthfront uses, but that wasn't a major factor by any means.

I think the main question is whether you can get behind the general idea of buy and hold, broadly diversified investing. There is a large group of people who self identify as "Bogleheads" that follow the principles of Jack Bogle, the founder of Vanguard. There is a boglehead forum with a lot of information if it interests you. The basic principle is quite simple and is largely based on the idea that study after study shows that low fee index fund investing is superior to actively managed fund investing. The whole strategy is basically: have a plan, keep it simple, don't time the market, diversify (don't be a stock picker), keep fees minimal, consider tax consequences, stay the course. I see Betterment as a way to do that although sacrifices a bit of extra fees for even greater simplicity.

As touhy alluded to in his post, that strategy has probably worked well for anyone who could stomach the large temporary drops in the market. The big question might be whether you are the kind of person who will panic and sell when things hit the fan. It's impossible to know, but I'm guessing the average boglehead forum member has fared better than the average itulip reader over the last decade. In the last real article EJ said he was starting to buy coal. I can't imagine that worked out well. The silver call was great, but it wasn't like itulip ever mentioned buying silver in the first place that I recall. I suppose the big calls are the overall stock market peaks, but it's hard to see how that would work as an overall strategy either. Again, when was it ever suggested to get back into the market? Itulip hasn't had a new article in over 2 years, but my recollection is that I haven't seen an article suggesting that the stock market was a buy at any point since the crash.

Who knows, maybe the US will follow Japan and buy and hold won't work well for 30 years. Of course, nothing says you have to only buy US stock.

[DSpencer]

Re: Comparing Robo-Advisors

Robo investing - is another illusion. Ultimately there is a human writing the code that determines the re-balancing. We live in an age when every one trusts the computer without considering the humans that built the machine. Very hard to believe that a computer system created by paid by the hour computer programmer can better manage money.
Managing a nest egg reminds me of every time I've worked at a startup. Many of the days you are at a startup you feel like you have made a mistake or at the very least your vision will never happen. Then when things look the worst the big day happens and you get acquired. But, there are also many times when a startup runs out of money. The great thing about running your own money is you can take a variety of approaches to your nest egg and have a few small home runs in your portfolio.
Sadly we are always looking for someone else to take the responsibility (I've struggled with this myself) and ultimately we need to learn to catch our own fish.

The goal of most robo advisors that I know of is not to beat the market or pick "hot" stocks. It is simply to maintain diversification. I am not sure why you think a computer is incapable of doing that. Honestly, I don't understand your premise that a computer system built by humans can't exceed the ability of humans. Did you see the news of AlphaGo beating Lee Sedol?

Roughly speaking, for every active fund manager that outperforms the market, there is another that under performs. Most studies I have seen suggest that few if any managers can consistently stay on top. "Past performance does not guarantee future results" and all that. Why should anyone pay 1% of their assets under management to have average performance?

[DSpencer]

Re: Comparing Robo-Advisors

This is the "retailing" of computerized algorithm based portfolios. What Blackstone pioneered in the institutional space. This growing retailing trend is something I have been pondering for a while now; mostly the consequences on the markets. I have a deepening conviction that as it becomes more widespread we may find markets increasingly volatile as the computers move masses of money into and out of the same holdings all together. I think we are already seeing the early signs of that. Stocks heading down just get devastated. Stocks heading up get bid into outer space as "everybody" (every computer) wants them.

In addition I seriously doubt each of these systems is proprietary, designed and supported internally by all these retail investing organizations - they have to be buying the core software from a very limited number of development vendors.

Similar to my response to BK, I think it is important to distinguish between current robo-advisors like Betterment and algorithms who try to beat the market. To my knowledge, Betterment is primarily concerned with just maintaining allocations. It is not searching for undervalued stocks. I think the main "danger" with that type of robo-advisor is that if they were used to a very high degree, they might make the markets less efficient. If the huge collective of people trying to price the market simply gives up and buys an S&P index fund there may be a weaker push towards "properly" pricing companies. In that environment it seems like active management could make a comeback by beating the index funds/robo-advisors by enough to justify their higher fees. I personally don't think we are close to that point.

It is interesting to consider that "passive" investing is really dependent on "active" investing to work properly. If you weren't convinced the markets were at least somewhat efficient, it would be insane to purchase a fund which owns thousands of stocks you know nothing about.

The bigger question is what would happen if more aggressive types of algorithms start saturating the market. If everyone designed their algorithms to make trades based solely on momentum I could imagine some insane volatility like you mentioned. However, I think it's likely that this will be counterbalanced by algorithms designed to trade on fundamentals. If you set some basic parameters such as P/E, yield, etc it would be hard to imagine things getting too out of hand. I assume that most algorithms would be designed with a combination to avoid getting caught holding the bag on some ridiculously overpriced stock. Of course, I wouldn't be surprised to see some individual situations where things get crazy.

[BK]

Re: Comparing Robo-Advisors

Yes. We live in a moment of peak coding where every thing can be solved with code and everyone needs to be a coder. Its bunk!

My background includes being a Business Development guy who has made his living representing Coders and sold one small company to Microsoft. I even had the pleasure of representing a natural language software processing solution back in 1999.

One day the world will realize that Robo investing is nothing but another scheme to get Assets Under Management and charge fees. If you can find a personality to market your financial services the next best thing is to sell a financial solution without any personality and the fire power of a computer.

I would compare Robo Advisor to black magic. Lets see how people like Betterment or other Robo Advisors when the Bear Market is well under way.

There are no easy answers to managing money.

[Thailandnotes]

Re: Comparing Robo-Advisors

There are no easy answers to managing money.

I think everyone on this site would agree, but it’s easy to fantasize about investing in RCP and BRK back in the late 80’s and early 90’s and doing a Rip Van Winkle.

[BK]

Re: Comparing Robo-Advisors

The best part of Robo advisors is there is no one to blame when investments go wrong. ;-) No advisor and you can avoid personal responsibility which seems to rampant in our society. ;-)

[DSpencer]

Re: Comparing Robo-Advisors

Yes. We live in a moment of peak coding where every thing can be solved with code and everyone needs to be a coder. Its bunk!

My background includes being a Business Development guy who has made his living representing Coders and sold one small company to Microsoft. I even had the pleasure of representing a natural language software processing solution back in 1999.

One day the world will realize that Robo investing is nothing but another scheme to get Assets Under Management and charge fees. If you can find a personality to market your financial services the next best thing is to sell a financial solution without any personality and the fire power of a computer.

I would compare Robo Advisor to black magic. Lets see how people like Betterment or other Robo Advisors when the Bear Market is well under way.

There are no easy answers to managing money.

Of course their goal is to get AUM and charge fees. That is the business model. This is like saying that a store is a scheme to get people to buy products and charge them for it.

Black magic? Only to people who don't bother to understand even the basics of what the service does. Will there be people who are upset that they lose money because stocks go down in bear markets? Of course. The people with human financial advisers will on average feel worse because they got the same result but paid 6 times as much for it.

If you fired your maid and bought a washing machine, would you complain when it doesn't fold and hang your clothes? The robo-advisers I have seen don't claim to time the market, pick the next hot stocks or prevent you from losing money. They just broadly diversify your holdings and can trade similar funds to take advantage of the tax code.

There's nothing magical about what Betterment does. I understand what Betterment does 100 times better than I understand how the computer I'm using works. The real black magic is in believing that the financial adviser you picked from the phone book knows the future.

[BK]

Re: Comparing Robo-Advisors

Here is a great assessment on Betterment diversification and written by a former Hedgefund manager https://www.thefelderreport.com/2016...ngerous-dogma/

I think diversification is BS. If I had wisely ignore diversification when a was a wee lad and only invested in Bond funds I would have made way more $$$.

Sorry but the folks who don't really well for them selves are not diversified. Lets look at EJ of itulip as a mentor. Bonds - (gold and Silver (out of that at the top) and he was heavily exposed to tech in the 97-99-00 through Angel investing).

Diversification crap that Betterment is selling is just a spin on the Modern Portfolio theory of personal finance.

I respectfully agree to disagree. Advisor are interested in maxxing out the AUM as is Betterment

The real magic comes when people make the time to learn about money. Come to grips with the fact they will make a bad investment.

For example, I have a friend who was sold a Cloud Computing ETF and this friend has a Master degree. I begged hime to sell, but his advisor assured him its a good investment. My friend is going to lose 50-70% of his money buying at a Peak.

People love money, but the hate to read about it or to understand it.