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October 30, 2015 at 07:55 AM
In response to my last blog, 5 Reasons Most Robo-Advisors Are Not, in Fact, Advisors, an industry “consultant” sent me an email that included one concern and a couple of poignant comments that help clarify the “robo advisory business.” First, here’s his concern:
“Your latest installment starts right out of the gate with the implicit premise that active management leveraging sophisticated portfolio analysis – code in full service advisory firms for “What are we selling this month?” – results in superior performance. The facts just don’t bear that out. Money invested in an S&P 500 index fund has always outperformed 95 percent of all actively managed “large cap” funds.”
He was referring to this sentence in my blog: “In the robos I’ve looked at, the algorithms for choosing investments and managing client portfolios are so rudimentary that competitive long-term performance is unlikely, while the potential for taking a large hit to value in the next market ‘correction’ is quite high.”
I can see how he might have gotten the above impression from what I wrote, but I wasn’t addressing active vs. passive management at all. In general, I’m a fan of passive investment management/indexing. In fact, I believe (and have written) that advisors should be required to justify in writing that their recommendations of more expensive actively managed funds are in the best interest of their client.
My comment about robos was based on my research that at least some robos use very questionable strategies to create client portfolios: perhaps the most egregious example that I’ve come across is a robo that selects mutual funds (and some ETFs) based solely on their performance over the past 12 months. Their marketing material states that other advisors who don’t recommend exclusively these “top performing funds” are costing their clients money. Which is true: right up until next year’s crop of top performers turns out to be different from this year’s crop. You get the point.
The consultant went on to say: “I am currently helping several firms articulate their robo strategy, whether that’s playing offense or defense. It’s been very difficult to steer them away from using their robo platforms as another avenue to further their alignments/affiliations with asset management firms who want to place product in their distribution channels. Unfortunately, I think most firms building a robo capability consider it just another [distribution] channel.”
