When it comes to investment returns, not all robos measure up

Schwab and Vanguard at opposite ends of robos' performance spectrum, advisory firm's report finds

Jan 25, 2017 @ 4:18 pm

By Liz Skinner

Just as no two financial advisory firms will provide a client the same results when it comes to investment performance, robo advisers vary greatly in performance for investors, a new analysis finds.

Seeking to illustrate that the assumptions and algorithms that digital advice providers build into their systems vary greatly and impact investment performance, Condor Capital Management's president Ken Schapiro opened accounts at more than a dozen robo-advisers with the goal of comparing the results.

The financial adviser, whose firm manages about $900 million in client assets, answered each digital adviser's questions with the same profile in mind, portending to be someone with a moderate risk tolerance, in a high tax bracket, who was looking to retire in 20 to 30 years. He sought similar investment portfolios, aiming for a mix of 60% equities and 40% fixed income.

After one year, performance at eight of these firms through the end of 2016 shows returns that vary from 10.75% with Charles Schwab, to 5.55% in the Vanguard Group account, the Condor Capital Management report found.

“Each are using a strategy and some are going to do better or worse at different times,” Mr. Schapiro said. “Given these are relatively new, its important to understand their characteristics and how they compare.”

With these results, the international component made a big difference in returns, as well as what kinds of bonds the firms used, he said.

2016 robo performance: 1 year portfolio return, net of fees
Source: Condor Capital Management's Robo Report™

For instance, the portfolio from the Vanguard robo was hurt by developed international equities that performed poorly after the Brexit vote, the report said. The digital adviser also relied on only municipal bond funds, which led the fixed income component of the portfolio to lag given the environment of rising rates, it said.

Vanguard, as well as many of the other digital advice providers included in the review, said the time horizon used in the Condor Capital Management study is too short to offer a meaningful analysis.

(More: Standout features of 10 robos aimed at advisory firms)

“It is more of a representation of asset class performance — not platform performance,” said Vanguard spokesperson Emily Farrell in an email. “As the report acknowledges, the portfolios that performed best were those allocated to top performing asset classes (domestic equities, emerging market securities, and gold).”

Dan Egan, Betterment's director of behavioral finance and investing, said the report focuses investors “on the wrong information at the expense of making better decisions.”

Mr. Schapiro's Betterment portfolio returned 7.14% last year, about middle of the pack, according to the report. This account benefited from emerging market exposure but was hurt by its large allocation to international developed markets, the report said.

The results ignore the services that Betterment offers to improve take-home returns, such as goal-based financial planning, tax-loss harvesting, asset location and retirement guidance, Mr. Egan said in an email.

“We focus on investor take-home returns, which you can't assess accurately after one year in a single account,” he wrote.

Michael Cianfrocca, managing director for Charles Schwab' corporate communications, said short-term performance is one measure to look at but that progress toward long term goals is “what matters most.”

(More: Robos jumping into socially responsible investing space)

“Around 80% of Schwab Intelligent Portfolios' clients are focused on retirement or building long term wealth,” he said in a statement.

The Condor Capital report found that Schwab's allocation to emerging markets paid off, as did the portfolio's inclusion of high yield and international bonds last year.

Another digital advice provider, Wealthfront, is not included in the results because it closed the advisory firm's account.

Condor Capital's account was closed after it misrepresented the methodology of their test and returns to CNBC with regards to their Wealthfront portfolio, spokeswoman Kate Wauck said in an email.

Wealthfront closed the account after concluding “the comparison test was fatally flawed,” she said.


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