Q2 2017 Robo Report Sees More Hybrid Advice Models

Posted on September 7, 2017

When robo-advisers first appeared seven years ago, investors and financial advisers were unsure if this was just the latest investment fad or here to stay. Since that time, it has become apparent that they will be a permanent fixture in the investment advice industry. Starting early in the evolution of these investment products, we opened and funded accounts at the most prominent robo-advisers in order to collect unbiased data. We now publish our findings in The Robo Report to help investors understand the robo-advisory landscape.

The technology introduced by robo start-ups like Betterment and Wealthfront, is achieving widespread adoption at financial service providers either as stand-alone solutions or in conjunction with more traditional advisory services. Broker dealers, fund companies and discount brokers are swelling the ranks of robo-advice providers. Many of the remaining large firms without a robo-advisory offering are rushing to roll one out. Goldman Sachs, Morgan Stanley and Wells Fargo are all expected to join this crowded marketplace in the near future. The result of widespread adoption is that individual investors will have to increasingly recognize and navigate these products when making investment decisions.

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This quarter’s report marked the first results from robo-advisers at Merrill Edge and Hedgeable. Next quarter we will report our first results from portfolios at Wealthsimple, SoFi and TIAA (formerly TIAA-CREF). Last quarter, TradeKing transitioned their portfolios to the Ally Financial platform following last year’s acquisition.

With the second-quarter 2017 Robo Report, we introduced reviews of the services and user experience of the various robo platforms. The second-quarter report includes reviews on Vanguard, Schwab, Betterment, Personal Capital, Merrill Edge and Hedgeable.

Trends in Robo-Advice

Not only are we seeing a regular stream of new entrants into the market, but we are also seeing the term “robo-advice” expanding to cover a wider array of advice solutions. One of the largest differences in products is access to live advisers. Some solutions are purely digital and offer no access to live financial planners, while others offer the ability to chat with or call a live investment professional.

While many of the earliest robos focused on solutions that eliminated person-to-person advice, it now appears many investors are not ready to give up that live connection. Betterment recently added an option for access to live advisers, following Schwab announcing the addition of a hybrid product late last year. Meanwhile, Vanguard’s popularity may be due, in part, to their hands-on approach, which always involves live planners. When selecting a robo-adviser, investors should consider what level of service they are looking for, as this will help them narrow the field of which robo-advice solutions to consider.

As robo-advice providers look for ways to stand out in a crowded space, some are utilizing niche investment themes to set themselves apart. Socially responsible investing (SRI) is one such differentiator and is being offered as an option by Motif, TIAA and Hedgeable among others. These robos are offering a simple way for investors to use their wallets to promote better corporate governance or attention to human rights or the environment, for example.

Assets continue to flow into robo-advisers. Vanguard recently announced that it reached over $83 billion in assets under management (AUM), which represents growth of approximately $5 billion a month. Vanguard has more than four times the size of Schwab’s robo AUM (Schwab is the second-largest robo-adviser by AUM).

Quarterly Robo News

Pension giant TIAA unveiled its own robo-adviser during the second quarter of 2017. Their offering has a 0.30% management fee and a $5,000 minimum, including options for low-cost passive investments, an actively managed strategy, as well as a socially responsible investing theme. Morgan Stanley Access Investing is Morgan Stanley’s upcoming robo-advisory service that is currently being tested by employees. We expect Morgan Stanley’s robo to include an option for SRIs.

SoFi, which started out as a fintech company focused on lending, is expanding to banking, insurance and wealth management. They rolled out a robo offering this quarter with a 0.25% fee, $500 minimum investment, and access to live advisers.

During the second quarter, Wealthfront announced a product called “Portfolio Line of Credit,” which allows investors to borrow 30% of their account value. The product is available for those with $100,000 or more in an account.

Other quarterly news included:

  • Fundrise launched a robo-adviser focused solely on real estate
  • Fiserv, a large financial services technology provider, announced a partnership with Goldbean
  • Personal Capital raised their minimum investment from $25,000 to $100,000
  • Canadian firm Wealthsimple reached $1 billion in AUM in May
  • London-based Investec debuted its own service, describing it as an “actively managed robo”
  • Credit Suisse and HSBC launched robo-advisory services
  • BlackRock acquired a significant stake in Scalable Capital in late June, further building on its 2015 acquisition of FutureAdvisor
  • Validea Capital launched a robo-adviser in April

Q2 2017 Robo Report

Another important finding of interest to individual investors from our report is the differences we see in the makeup of the portfolios. Our taxable accounts are built by presenting the same risk profile to each robo-adviser, aiming for portfolios with a 60%/40% equity to bond split for investors in a high tax bracket. As for the IRAs, the goal was to have the most aggressive (highest stock) allocation. Starting with a similar baseline allocation across the portfolios allows us to measure performance and compare how our funds are invested as equally as possible. As we observe our universe of holdings over time, we are surprised by the diversity of the makeup of the equity and bond portions of the portfolios.

Within the equity portion, some portfolios have 21% international exposure, while others have nearly 50%. Hedgeable is at the low end with 21% of total equity in international funds, compared to FutureAdvisor at the high end with international at 54% of total equity.

Differences in fixed income can be even wider. Schwab, for example, has nearly 70% of their fixed-income allocation in international or high-yield bond funds, which are typically considered higher risk. Vanguard, on the other hand, holds 100% of their fixed income in municipal bond funds. Figure 1 shows the allocation of total equity between domestic and international securities for each robo-adviser tracked in the Robo Report.

Figure 1. Robo Equity Allocation

Figure 1. Robo Equity Allocation

Source: The Robo Report. Data through 6/30/2017.

For investors, it is important to understand that not all robo-advisers build their portfolios the same way. Those seeking a more “risk-on” approach may want to consider Schwab. Those looking for a simple, straightforward and broad market portfolio may want to consider Vanguard, where the portfolio holds just five exchange-traded funds (ETFs). Investors seeking a more active approach may want to look at Hedgeable, which is one of the few robos in our universe where we see regular trading activity. These differences provide examples of why we believe transparency is critical to investors.

Figure 2 displays a sample table from the report showingfacts about the accounts, like fees and minimum investments. It also highlights differences in the portfolios, such as percent of equity allocated internationally and percent of the fixed income that is allocated to municipal bonds.

Figure 2. Robo Taxable Account Facts

Figure 2. Robo Taxable Account Facts

Source: The Robo Report. Data through 6/30/2017.

Given most of the robos we cover follow a passive, low-cost indexing type of approach, the largest driver of returns is their asset allocation strategies. Some of the largest differences in asset allocations between the portfolios is how much is allocated to international markets. This makes the interaction of allocation decisions and the relative performance in international markets potentially the largest factor driving returns.

While we did not see any significant tax-loss harvesting, we did see modest rebalancing trades. The lack of tax-loss harvesting was expected, as the markets continued to show a strong period of growth during the second quarter of 2017.

Second-Quarter Robo Performance

Continuing the trend from the first quarter of 2017, international equities outpaced domestic ones, while large-cap growth led the way domestically. Fixed-income portfolios with a “risk-on” outlook owning corporate and international debt, as well as those holding longer maturities, fared the best, while Treasury Inflation-Protected Securities (TIPS) holdings performed poorly.

While U.S. markets generally posted solid positive returns, foreign holdings again led the way, with foreign small- and mid-cap stocks performing notably well. Internationally, there was a reversal from the first quarter, with developed economies generally outperforming diversified emerging markets. China as a notable outlier outpaced most other nations. So far this year, international markets as a whole have outpaced domestic markets, with the FTSE USA index returning 9.6% and the FTSE All World Ex-US index returning 14.3% in the first half of the year.

Even though developed markets outpaced emerging markets during the second quarter, for the first half of the year as a whole, emerging markets outperformed developed countries. Regarding the taxable accounts, Fidelity Go and Vanguard both rely on a single international global ex-U.S. equity fund for their entire allocation, and those two funds have more than 80% in developed markets. The large weight in developed markets helped them this quarter. Betterment and WiseBanyan had similar 80%/20% weightings between developed and emerging markets.

Growth outperformed value again this quarter by about 3% on average. The Russell 1000 Growth index returned 4.7% during the quarter compared to 1.3% for the Russell 1000 Value index. Additionally, the S&P 500 Growth index at 4.42% outperformed its value counterpart at 1.51%. Value has historically outperformed growth and the robo portfolio managers have taken note. None of our robo portfolios are overweight growth equities, while many show a weighting toward value. The recent outperformance of growth equities has weighed on several robo-advisers’ portfolios: Both Betterment and Schwab have significant weightings toward value investing, with more than 50% of their domestic equity allocations in value-oriented funds, while FutureAdvisor has 34% of its domestic equity allocations in a value-oriented fund. Ellevest and Merrill Edge also show a weighting toward value, but to a smaller degree.

Large-cap outperforming small- and mid-cap U.S. equities is a trend we saw in the first quarter that continued through the second quarter. Impact of this trend on our robos is somewhat limited, as many have a market or close-to-market weighting between their large-, mid- and small-cap allocations. In fact, quite a few robos rely entirely on the Vanguard Total Stock Market ETF (VTI) or a similar total stock market index for their entire domestic equity exposure. These total-market ETFs commonly have around 70% to 80% of their holdings in large-cap stocks. WiseBanyan, Vanguard, SigFig, TD Ameritrade and the taxable Hedgeable portfolio use a single all-market domestic equity fund. Robos that had a positive impact from the outperformance of large-cap securities include FutureAdvisor and Fidelity Go.

Figure 3 shows the performance results of the portfolios. Performance is broken down by equity, fixed-income and total performance over three different time periods. Investors can easily compare how different robo-advisory services are performing. All returns are net of fees. A full set of disclosures, including specifics on net-of-fee return calculations for the different portfolios can be found in the full report at www.theroboreport.com. All results are as of 06/30/2017.

Figure 3. Robo Performance

Figure 3. Robo Performance

Source: The Robo Report. Data through 6/30/2017.

Figure 4 highlights the best performance in equity, fixed income and the total portfolio performance for the quarter. Quarterly results can vary significantly and as time passes it will be easier to use our data to identify long-term trends and see how the different portfolios perform in a bear market. The returns for the quarter ranged between 3.22% and 2.13% in our taxable accounts and 3.88% and 2.71% in our IRA accounts.

Figure 4. Best Robo Performance

Figure 4. Best Robo Performance

Source: The Robo Report. Based on data through 6/30/2017.

E*Trade’s Hybrid led the group in fixed-income returns by employing active managers in the two municipal bond funds that make up the fixed-income portion of their portfolio. This appears to be an area where E*Trade Hybrid has created value by using active funds, both outperforming the E*Trade ETF strategy and the group as a whole. The average maturity of these funds was in the middle to long range. This strategy helped avoid losses due to short-term rate increases. E*Trade ETF was also a strong performer, with half of their bond portfolio in an investment-grade intermediate bond fund and the iShares Core U.S. Aggregate Bond ETF, capitalizing on a low allocation to short-term bonds, which suffered this quarter. Schwab’s fixed-income allocation also performed well this quarter, partially due to an emerging market bond ETF that performed particularly well. Their other holdings in two municipal bond funds and a high-yield fund all had above-average returns.

Figure 5 shows performance across the taxable portfolios. Performance is net of fees. Portfolios without a year-to-date or trailing-year return have not been open long enough to have these data points.

Figure 5. Robo Performance

Figure 5. Robo Performance

Source: The Robo Report. Data through 6/30/2017.

As more robo-advice products enter the market, it can be a daunting task for consumers to try to select the best platform. The first decision any investor should make is what level of live help they desire. Is a digital-only solution sufficient, or are there greater planning, tax or other considerations where a live planner can add value? When considering whether to choose an option that includes a live adviser, new clients should keep in mind that being able to speak to a real person during a market downturn can be reassuring and can help avoid emotional decisions.

Risk and Return

When looking at returns only, an investor is only seeing part of the performance picture. To truly understand performance, investors must also look at the underlying risk of the portfolios. This can be measured by the standard deviation of the portfolio, which is a measurement of volatility. Also, investors commonly use the Sharpe Ratio as a metric, which is a measurement of risk-adjusted return. A higher Sharpe Ratio implies higher return for each unit of risk. We performed the risk-adjusted analysis for our individual portfolios that have been open for one year or more; results are shown in Figure 6. We are pleased to announce inclusion of both of E*Trade’s ETF and Hybrid models, as well as FutureAdvisor, as they became data eligible this quarter. The analysis is based on 12-month returns ending June 30, 2017.

E*Trade Hybrid had the highest Sharpe Ratio of the group and second highest one-year trailing return. This may be due, in part, to a couple of their actively managed funds outperforming this year, adding positive active return. Schwab was again a strong performer in risk-adjusted return with the second highest Sharpe Ratio and highest one-year trailing return.

Figure 6. Robo Portfolio Risk-Measures

Figure 6. Robo Portfolio Risk-Measures

Source: The Robo Report. Data through 6/30/2017.


After considering levels of service, investors should look at fees and performance. Although robo-advice solutions are low cost, there can still be large differences in their fees, depending on the adviser and the level of service.

Performance and risk management are important and, for the most part, are impossible for potential customers to evaluate on their own. The Robo Report gives investors a look inside portfolios at each robo-adviser, along with analysis to help investors make informed decisions.

After using the above criteria to select some likely candidates, investors can ask themselves if they are interested in extra features like socially responsible investing. If a sleek app and website are going to help keep them engaged in their finances, investors should test the user interfaces at different robo-advisers.

There are many robo-adviser options available to investors. While not a good fit for everyone, we are confident that robo-advice is here to stay. With the techniques mentioned here and analysis in The Robo Report, investors can select the correct balance of services, fees, risk and performance to choose the best robo-adviser for themselves. For those seeking more portfolio analysis, in-depth reviews of interfaces and services, our report can be found at www.theroboreport.com.

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