Robo-advisors may win on costs, but they could be losing to advisors on other fronts
As investors become more cost-conscious and investments in fintech continue to improve machine-mediated investing, it seems that robo-advisors are here to stay. But even though they present a low-fee solution to many people’s problems, that doesn’t mean people should be firing their financial advisors.
“[W]e could look at fees and focus on that number. However, we’d be missing the point,” Financially Simple founder and CEO Justin Goodbread said in an article published by Kiplinger. “Our end focus should be on the returns, not the fees.”
To explain, Goodbread cited a test conducted by Condor Capital Management CEO Ken Schapiro. Schapiro subscribed to different robot trading companies using the same investor profile in mind; he wound up with moderately aggressive portfolios, through which he invested the same amount until 2016.
“Interestingly, there was a more than 5 percentage-point performance difference between the robos,” Goodbread said. “[So it’s clear] that just because you pay less in fees, doesn’t mean you’ll necessarily get the best return.”
There’s also the question of whether robo-advisor performance will be robust. Just like ETFs, robo-advisors have risen in a largely climbing market; there’s no historical record to show how well they’ll do in a bear market.
“We can, however, look to Brexit and the market crash of 2018 for some indications,” Goodbread said. He said that on June 24, 2016 — the day after Brexit — robo-advice giant Betterment halted trading in all its accounts for two hours, while some human advisors and even some robos rebalanced portfolios to protect against a possible downturn. And a few weeks ago on Feb. 5, the market took its largest dip in more than six years; robo-advisors did not cope well, with the two largest robo sites crashing on the day.
Noting that do-it-yourself investors can’t expect support from a trusted advisor during downturns, Goodbread cited a study by financial services firm DALBAR. “[M]anaged investments from 1990 to 2010 had a return on investment of 7.81%, while the average investor going the DIY route, earned 3.49%,” he said.