Latest twist in robo-advice: Actively managed funds

Untested approach compared to adding cyanide to cupcakes

Jan 5, 2015 @ 11:55 am

By Jeff Benjamin

Schreiner Capital Management is turning up the heat on the fast-evolving robo-advice game by employing actively managed and alternative-strategy mutual funds on a new platform called ALTS.

The use of active funds in a robo-adviser is believed to be an industry first. Brian Schreiner, president of the $40 million advisory firm behind ALTS said that's more than just a gimmick to help his new platform stand out among a growing list of competitors that are using index-based funds.

“Passive, or buy-and-hold investing might seem like a good idea when the markets are strong, but when markets crash, passive investors get hammered,” he said, adding that “90% of the world is using active investments, yet there's no active management among the robos.”

Like most robo-advice platforms, Mr. Schreiner's effort will utilize online tools to evaluate risk tolerance levels and investment objectives, but he believes the allocation to active strategies will make the platform more competitive from an investment performance perspective.

“Today, the online advice industry has nothing to offer investors who use active and alternative investments,” he said.

There might be a reason for that, according to Ric Edelman, founder of Edelman Financial Services, which offers both online and in-house advisory services.

“I don't know any online advice platforms that use active management, but I also don't know of any bakers that add cyanide to their cupcakes,” he said. “It makes me curious as to why someone would feel motivated to build a site that allows people to do online what hasn't worked offline.”

Harsh criticism, for sure, but not without a certain amount of merit.

According to Morningstar Inc., only 30% of actively managed mutual funds were able to outperform their respective benchmarks in 2014, which was even worse than 2013, when only 46% of active funds beat their benchmarks. Of course, over those two years, the S&P 500 gained 44%.

Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ, also took the position that active management in a robo-advice model could be introducing more problems than it is solving.

“There are often mutual fund manager changes that warrant attention, so a robo-advisory offering that fails to regularly conduct due diligence on active funds is likely not providing enough support,” he said.

Mr. Schreiner fully recognizes that the equity markets have enjoyed a multiyear run that has strongly favored passive investing strategies, but he remains a trend-following momentum investor who believes in active management.

The platform will employ nine risk-based models that will be matched to investors. Just like his traditional advisory business, the investment minimum for the robo platform is $100,000. But the fee structure for the online advice is set at 50 basis points, compared with an in-house advisory fee of 1.95%.

While Mr. Edelman might take issue with Mr. Schreiner's use of actively managed funds, he does believe that the robo-advice trend is the future of the advice business.

“Robo-advisers are evidence of the power of technology and online services and mobile services are either going to be a threat to advisers who fail to adapt or an opportunity to advisers who adapt,” he said. “No question that some advisers will benefit, and others will be driven out of business by robo-advisers.”

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