In fact, we offer an automated investment solution, or “robo advisor,” through our own firm, called AFA Advantage. The genius of these automated programs is that they provide an inexpensive investment alternative featuring a no-frills computerized interface, 24/7 mobile access, and disciplined trading.
(By the way, feel free to check out AFA Advantage via our website to learn more about the benefits of our online investment approach. It’s the most affordable solution when you are looking for investment management expertise without the cost of add-on financial planning services. Our online investment advice platform builds, monitors and rebalances your portfolio using low-cost ETFs (Exchange Traded Funds) with no additional transaction or other program fees. It’s ideal for the younger investor who wants professional and cost-effective portfolio management without the expense of add-on personal financial or retirement planning services.)
But it’s important to remember that all these “robo advisors” invest your money according to an allocation designed by a human being. Think of the portfolio designer as the man – or woman – behind the green curtain in The Wizard of Oz.
What may surprise you is that investment allocations differ greatly from firm to firm, which means that your returns could vary greatly as well. So while the allocations are executed by a computer, they’re designed by a person with a very specific and unique investment outlook.
Here’s how one recent study measured returns at 8 different robo advisors. Similar portfolios – roughly 60% stocks and 40% bonds – were implemented at the different firms.
“After one year, performance at eight of these firms show returns that vary from 10.75% with Charles Schwab, to 5.55% in the Vanguard Group account,” says the firm that ran the study.
What hurt the Vanguard accounts was a larger than average holding of international stocks, which lagged U.S. equities last year. The Vanguard portfolios also held tax-free municipal bonds, rather than taxable bonds. Municipal bonds were more affected by the surprise Trump election victory, and went into an end-of-year slump.
The point here isn’t which company produced the biggest returns. Short-term results, like those in the study, aren’t particularly meaningful, and investors should focus on long-term results as they prepare for their retirement. It’s not uncommon for an investment management firm to lag one year only to outperform the next.
The true takeaway is that robo advisors don’t change the quality or the nature of the investment advice; they only change the pricing and mode of delivery. So before you consider using a robo advisor, take a hard look at the investment philosophy behind the curtain. Ask yourself whether the portfolio risk and return are a good fit for you, and if portfolio management – without any personal planning services – will suffice to get you to your goals.