Not all digital advice platforms are created equal. But which one ultimately serves your clients best will take a bit more time to tease out.
A recent analysis by Condor Capital Management attempted to provide an early peek at winners and losers. The firm's president, Ken Schapiro, opened accounts at more than a dozen so-called robo-platforms to compare results based on the same client profile: moderate risk tolerance, high tax bracket, 20 to 30 years until retirement — and a goal of a 60% equity/40% bond mix.
Turns out the performance of offerings routinely lumped together as robo-advisers varied greatly in 2016. Though the execution for all the robos was computer-driven, there was a human behind each algorithm. This is why the same client profile can inspire very different assumptions about the best portfolio for a particular person in a particular market environment.
Charles Schwab's portfolio for Mr. Schapiro gained 10.8% last year, according to Condor, while the Vanguard Group account garnered 5.6%. Others, including Personal Capital, SigFig and Betterment, fell somewhere in between.
Wealthfront decided to close Mr. Schapiro's account, saying the comparison was “fatally flawed.”
But Condor's exercise and InvestmentNews' reporting on it are not to say Schwab has the best platform or Vanguard the worst. Hardly. A year's worth of data will only tell you which robo's portfolio-building algorithm is likely to excel in a market scenario that unfolds exactly as 2016 did in terms of the top-performing asset classes — and only if the robos' allocation decisions along the way remain the same. Unfortunately, you can't know that ahead of time.
The U.K.'s vote last summer to leave the European Union, for example, negatively affected the performance of robos that allocated more of Mr. Schapiro's portfolio to international equities from developed markets. In another environment, or with a different voting outcome, the reverse could have been true. The same is true when a traditional favorite of highly taxed individuals — municipal bond funds — lags, as that sector did last year.
But the comparison is interesting — eye-opening, even — if only because it demonstrates that there's more to choosing a robo than the fees they charge or the amount of cash they require your clients hold.
As Betterment's director of behavioral finance and investing pointed out in Liz Skinner's story on the Condor study, the results didn't take into account services beyond general investing, such as goals-based financial planning, tax-loss harvesting and asset location. But relative performance can also be an arrow in your decision-making quiver.
A benchmark 60/40 U.S.-based portfolio (S&P 500 Index/Barclays U.S. Aggregate Bond Index) returned about 8.2% last year (before fees and with dividends reinvested). Throw in some global allocation and you could've ended the year with a gain in the low 9% range. Isn't it fair to at least consider performance relative to whatever benchmark fits your situation, appreciating the limits of the sometimes necessary short-term nature of it, in any decision made regarding investments?
But will picking a robo become like picking a mutual fund? Not exactly. The thing is, with a robo, you don't really know what you're going to get until you get it, at least at this early stage in the product's evolution. Because a portfolio is built differently depending on an individual's profile, it's hard to track performance long term before you're in it.
But as more studies like Condor's are conducted and more data from a longer existence of these nascent robos become available — especially if trends are detectable — choosing a robo based on multiple factors, including historical performance through different market environments, will be possible. Will one robo have a consistent record of more aggressive investing for a particular client profile than another? What about the Sharpe ratio or other measures of volatility?
Perhaps, as with mutual funds, diversifying among robos will turn out to be a useful strategy for finding the right balance of results.