The Robo-Advisor Challenge

The financial world these days seems to be going crazy about the potential of robo-advisors as being the future of investing. My experience in speaking with average individual investors is that they have never heard of them. But this will probably change when the purveyors of robo-advisors crank up their marketing machines.

So what is a robo-advisor? I will take the definition presented by Investopedia which is as follows:

““A robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use human financial planners. Robo-advisors (or robo-advisers) use the same software as traditional advisors but usually only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning.” ”

In today’s world of investing it seems that only the well-off get quality investment advice. Many of the best advisors require a minimum account level of $200,000 and higher. This leaves the majority of the public seeking advice from advisors who are essentially salespeople. Several organizations have decided that robo-advisors are the answer to filling this void.

But do they work? It is difficult to say. Backtested results from 2014 would suggest that they don’t. For two of the top sellers of robo-advisor services their “aggressive” portfolios earned 3.45% and 4.83% for the year. This while the S&P 500 earned 13.5%.

Now compare these returns to those of a Simple NAOI Dynamic Investment that earned 16.9% during 2014 without human guidance. Refer to the Dynamic Investing Theory page on this site.

In the opinion of the NAOI, the problem with robo-advisors is that they simply automate portfolio design methods that are outdated. Yes, they may be more convenient to use and less expensive than a financial advisor, but these benefits don’t come close to earning them the title of “the future of investing.” This title can only belong to an innovative methodology that changes how we invest at its very core, not on its surface. Thus, the future of investing title belongs to NAOI Dynamic Investments, not to robo-advisors.

Of course using one year results is not a statistically relevant test. So, I challenge any seller of any robo-advisor to compare their results against the results of a simple Dynamic Investment for a length of time of their choosing. I will happily publish the results on this blog.