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Computerized Investing

Discovering How to Beat Robo-Advisers

Are the robo services really providing a service that a savvy individual investor couldn’t replicate?

by Jaclyn N. McClellan | August 2016

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In September, I am speaking at the Eastern Michigan AAII Local Chapter on the topic “Robo-Advisers: What They Do and How to Beat Them.”

Our coverage of the topic of online investment advisory services has evolved. In the beginning it was solely going to be an overview of what robo-advisers are, how they handle volatility and how the robos compare to human advisers. As I continued with my research, the topic developed to add the “and how to beat them” portion that I’m actually rather excited about.

Let me tell you why.

When going through the benefits and caveats of using robo-advisers, I’ve come to realize there are definitely compelling arguments both for and against using automated investing services. On one hand, using an automated service frees up time and, after all… computers don’t have emotions, right? But on the other hand, are the robo services really providing a service that a savvy individual investor couldn’t replicate?

The more I dig, the harder it gets. Many of the robo-advisers are difficult to compare with one another. A lot of them use the same “buzzwords” like tax loss harvesting, rebalancing, modern portfolio theory and diversification.

I’m excited to figure out how to beat the robo-advisers, not only because it presents a challenge, but because I think it will be value-added information for individual investors. Once I figure out what it would take to replicate the robo advisers’ methodologies and their respective returns, investors will be able to decide whether doing it themselves is worth it or not.

It’s also worth noting that many of the firms that employ human advisers (as opposed to robots) have decided to “embrace the robo” by purchasing robo-advising companies and integrating them into their planning and implementation processes. Two examples are Invesco Ltd. (IVZ) purchasing robo service Jemstep and UBS partnering with robo-adviser SigFig.

There are also large asset management companies launching their own robo-advisers. For example, Vanguard launched Personal Advisor Services, Charles Schwab launched Schwab Intelligent Portfolios, Fidelity launched Fidelity Go, and Wells Fargo & Co. (WFC) recently announced that it intends to create a robo service of its own.

Finding the performance of the robo-advisers is not always an easy task. Some companies come right out and state their performance, while others simply say some version of “each investor gets a tailored investment plan so quoting performance is difficult.”

If you have used a robo investing service, reach out to us at CI@aaii.com. We would love to hear about your experience.

This month, we have an On the Internet article that introduces NewRetirement, a website that offers a retirement calculator and resources to develop a holistic retirement plan that can be customized by the end user. Check out their website and let us know what you think of their retirement calculator.

Technician is the Featured App this month. Designed by ChartIQ, the Technician application offers a wide range of studies and indicators (over 100) for traders, and as an added bonus—it’s free.

Lastly, this month in our Best of the Web section we are covering Financial News and Analysis. We break financial news down into three sub-categories: company news, economic news and sector/industry news.

Discussion

Arthur Swanson from WA posted over 9 years ago:

What a waste....He didn't say anything...


Claude Y Paquin from GA posted over 9 years ago:

The lady who gathered and provided this information did an excellent job. The information is useful.


D Stanczak from IL posted over 9 years ago:

Perhaps including a link in this article to the transcript of the presentation at Easten Michigan Chapter of AAII would have been helpful.


btlRickas01 from IL posted over 9 years ago:

Good Luck Jaclyn you have your work cut out for you. When your article is finished, I hope you won't tolerate the excuse that “each investor gets a tailored investment plan so quoting performance is difficult.” and call out the Bot companies who use this dated excuse.


Tony Hausner from MD posted over 9 years ago:

Would appreciate seeing slides and a summary of what data there is on how well these roboadvisers have done. From what I know some have done fairly well. For instance, Alpha Architect has been doing fairly well from what I have heard.


Jackie McClellan from IL posted over 9 years ago:

I will include more information about the presentation after I do it. I haven't given the speech yet, which is why no specifics were included. This was more of me professing my interest in the topic and mentioning that as I'm going through the information, I am excited to write more content about it. I do intend to include a table of performance from each of the robos, the difficulty is not a lot of them present returns calculated the same way (of course not that would make it easy!) And btlRickas01, I will not take that as an excuse! If they are expecting investors to hand over thousands of dollars, they better have some return figures.


Beatrice Kenney from AZ posted over 9 years ago:

Robo advising, to me, does not seem to be much different from asset allocation which is available for free in sites mentioned elsewhere in past CI issues and the AAII Journal or in just reading about it or getting advice from your financial advisor. Robo trading, which I am learning, through services like Collective 123, CoolTrade, and soon VectorVest is appropriate to a fast paced, high frequency approach. They make more sense to me, as does Scott Judd's Sector Surfer which uses an algorithm to determine what he calls sequential allocation, one sector at a time.


Gene Lowe from NV posted over 9 years ago:

Nice dog!


Tony Hausner from MD posted over 9 years ago:

Suggest you ask roboadvisors for the stats and tell them why. And also what formulas they are using.


Thomas Rumore from CT posted over 9 years ago:

It will be interesting to find out not only the purported "results" but also the methodology used to calculate them. And if one or more of the robo-advisors should claim GIPS compliance for their results, I might even be inclined to believe the numbers.


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