Your Guide to Understand (And Compete With) Robo-Advisors

Let me be clear about something before we get too far into this. First, this is one of the longest posts I’ve ever written — sorry. But hopefully it’s worth it. And I warned you

This post will be part of an in-depth series on the topic. So, to get started I think we should all be on the same page about what I think robo-advisors (online investment platforms) offer as their value proposition, and delve a little bit today into where & what they may be lacking.

Let me also say that I think these investment platforms are valuable tools for the right people. I’m just not sure the investing masses as a whole are necessarily the right people for the solutions we’re seeing today, at least as they’re being presented & marketed.

So, what do robo-advisors offer, basically?

  1. Low fees: I’d argue too low too for most of them to be profitable anytime soon or ever profitable for their Venture Capital investors (See Wealth Out West’s Wealthfront analysis — while his growth projections probably aren’t realistic the breakeven analysis probably is)
  2. Low minimums: They call this democratizing wealth. I call it capitalizing on opportunity. (If you are just starting out as an investor, I’d be much more likely to recommend a good target-dated fund from Vanguard to help keep your behavioral biases in check, instead of clicking on a robo-website)
  3. They all religiously offer index-fund based buy & hold portfolios using low-cost ETFs available to anyone (Vanguard, iShares, Schwab, etc.)
  4. They all offer asset allocation models assigned by your risk profile, but using very basic factor analysis. Age, income, size of portfolio, and maybe a couple of questions, “if you lost 10% what would you do”… (Something that every advisor has been using for years to construct portfolios, or to be even better should be using this
  5. Simple online reporting offering position & performance reporting and transactions (something every advisor can (and probably does) offer using any of a number of service providers)
  6. Portfolio rebalancing (Some of these services tout daily rebalancing, which is total overkill — but snazzy)
  7. Tax-loss harvesting (Some of the services tout daily, which is, again, total overkill and probably more overhyped by them than it should be)
  8. Live online customer service (Basically live chat. Some robos offer “schedule a call” online calendar — both of these features are good ones to have, and are offered by them via third-party providers any advisor can buy for less than $100 a month — and in a lot of cases for smaller boutique advisor firms, for free)
  9. In some cases, these robos offer basic goal-based planning to show how much you’d need to save and invest to reach a stated goal and what changes to the portfolio will do to affect those plans. (Simple monte-carlo simulations — For an even better result in the hands of a practitioner see: MoneyGuidePro)

And those services and features all sound pretty good, right? And they are, on some level…

That’s also stuff any adviser armed with some of the latest technology can pretty easily implement (some of the tools are buried in the links above). And, when paired with the human touch and real world experience, a practitioner would arguably exceed their strictly online counterpart in adding real value to an investor.

Now, to be clear, what I’m proposing isn’t a roadmap for an adviser to raise $X billion in assets in X years or months, or days, with tens of thousands of clients enabled to point & click risk up and down. That’s not really, I think, a very great solution based on what I’m seeing so far.

This is about offering something to an investor that’s scaleable, delightful, and something truly beneficial for the investor (AND SERVICEABLE for an adviser, team of advisers, or investment management firm). I’ll explain.

“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffett

All of these robo-firms have grown up in a bull market. Now, I know they’re all rolling their collective robo-eyes right now anticipating what I’m about to say next — but when the next crash or correction happens (and I’m talking only about the 20% corrections that happen 11% of the time), this will be the real first test on their service model, which is completely a different thing than actually investing. Buying & selling is one thing — proactively servicing that client base is something completely different — and they all laugh now, saying their investors are savvy and they have datasets going back 128 weeks to show they’re going to be okay as a firm on the service front. Yes, one of them actually intellectually defended their “statistically significant” dataset of a whopping 128 weeks… but I digress.

In these firms’ narrative, their clients know this is for the “long run”, they don’t have lizard brains, and these clients will hold onto their portfolios and not burn up their servers and phone lines when the next big downturn does happen… which is what everyone says at the first wiff of a downturn, until that leads to their first 20-30% drawdown in portfolios, which will also happen.

Maybe I’m wrong, but I’ve seen even the most aggressive & experienced investors I know get antsy when markets are really crashing and they’re starting to lose more than 10% in their portfolio.

Example: Jason Calacanis. He is a very smart venture capital investor; seriously — he is. This guy has seen and invested in the new opportunities miles ahead of you and me, and I’m going to share something that he did recently to his Wealthfront portfolio that might make you think twice.

(Note: I hope you realize I’m not trying to pick on you at all @Jason — but you posted what I’m about to share on Twitter — and let me add, I respect you and like what I know about you from your public persona — and hopefully this is a value-add for you and everyone reading this, and maybe it won’t be; and that’s okay. I’m happy to chat over coffee too, Jason. I did reach out to you on Twitter before publishing this as a courtesy, but I never heard back and I didn’t want to keep hounding you, because I’m not your adviser). Like I said, hopefully this will be a value-add, because most people aren’t as smart or savvy as Jason.

Screen Shot 2015-03-04 at 11.42.49 PM

Like I said, he’s one of the smartest, with a wide view of what’s what and who’s who in the world. And do you know what he said on Twitter? This:

Screen Shot 2015-03-04 at 4.36.13 PMWhy? Because…On November 23rd, he was feeling what you’re about to read in his other tweet.

Screen Shot 2015-03-04 at 11.16.28 PM

(maybe you’re also noting: he sought thoughts — from people — before making the switch)

In probably a couple of quick & easy mouse clicks he made those changes a couple of weeks later. And here’s how those moves have fared since…

Screen Shot 2015-03-04 at 4.41.35 PM


His view of the market environment, and ability to act without any real block or tackle with a real adviser has cost him .7% in performance thus far (as of March 4). That’s not including any taxes consequences (it was a taxable account — and if he’s been in it for the last two years, me thinks some of the gains weren’t small). It also doesn’t account for the possibility of continued “underperformance” if the market continues to rally to higher highs.

Of course, he could just be early, and right too — I’ll concede that — and even congratulate him, if the market does continue to drop from here (btw, while I think buy & hold has a place in some of everyone’s portfolio, it’s hardly a panacea — and most investors aren’t being informed enough about the risks by the platforms I’m seeing today). But if Jason’s move is right, that would be market timing…and basically against everything Wealthfront is promoting today (when they were a Facebook trading game called KaChing not so much… but today, market timing = bad). I digress.

So what did we learn, for now? Especially if he took a big tax hit — it might not have been the right move to make. Of course, maybe being a risk 10 wasn’t the right place to be in the first place. Or maybe he did get it right (get out now, the drop is coming)… but that’s not online advice… that’s a glorified index-fund portfolio trading system for .25% a year.

 “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”

“But we’re saving a lot on fees” using these robo-services. “And it’s amazing.” That’s gotta be worth something. And it is… it’s worth about .25%. But probably that’s too expensive still if that’s how people are really using it –ask one of my favorite financial authors, Jason Zweig, about what the history shows regarding investors acting on behavioral bias. History shows investors will end up costing themselves way more than .25%. 

My point is this — everyone pays attention when it’s really bad out there (whether it’s real, or in their minds), and everyone I know pays attention when they lose 10%. I’ve been through a lot of market cycles too, way more than 128 weeks.

And those people.. they do probably need someone to talk them off the ledge. Someone who is tied into their values, their plan, and their personal connections; someone to be a voice of reason — “how about instead of going from 10 to 3, we start by reviewing everything more in-depth and maybe that data will show us you really should have always been a risk 5 or 6 based on what you’re really comfortable with. And then, we can modulate down incrementally (watching the tax bill) and see how that feels before we do something so extreme”.

My point is a real adviser is a useful anchor to bring people backinception-spinning-top-totem-replica-3 from the echo-chamber of their minds, and probably prevent them from biting off more than they can chew. And remember Jason asked PEOPLE for thoughts when he first started considering his next move — and that counsel is something an email or blog post, or Knowledge Center FAQ, or a live chat session, or a fancy graph isn’t going to offer, no matter how flowery, timely or smart. A pure online provider is probably never going to fix that for most of these types of people (ie. almost every investor I’ve ever come across) — that’s something that takes dynamic depth, context and breadth.

They Live.

When these services first launched Betterment was originally a compliance officer’s nightmare, marketing themselves as an “alternative to your savings account” and Wealthfront, again, was called KaChing (Their 2.0 effort morphed from a Facebook game into a platform where investors hired “geniuses” trying to beat the market).

There wasn’t a phone number almost anywhere to be found on their website homepages because their narrative was they were “cutting-edge”, but now it’s commonplace to see their phone numbers prominently displayed right there on the front page. Why? Because when things go very wrong, people want to talk to people.

Example: Ring ring. Welcome to X company our menu options have changed… You: “Yes. No. Operator. Agent. Agent.” Press 2 for your options in…“Agent. AGENT.”

You see — Technology is really great and amazing and I love technology, until it doesn’t work; and even my trusty Mac notebook needs to see a genius from time-to-time.

So, what’s the firm’s disaster plan in that event? Hope nobody really needs them? Send out a lot of emails? Let me tell you — they don’t have one if another prolonged downturn hits again (and it will). Not. Gonna. Happen. That same “128 week period” I talked about was them testing their systems… and found they were okay (during two years of a bull market, btw)… hey the market dropped 4.5% in a month and their systems worked. That’s child’s play. But maybe it won’t happen… maybe another 2008 or 2000 or 1993 or 1987 won’t happen because it’s such low a probability (see Jesse Livermore) —  they, as a firm, can be in 80% stocks for the long-run and simply outgrow the next inevitable pullback. Their churn isn’t bad right now, and most of those are small free accounts anyway which isn’t a big part of their firm-wide assets.

And if that is the attitude, maybe then the client is simply left to their own iDevices, trusting that the 6 questions they answered were enough to steer them through the storm — because they’re the ones clicking the mouse & tapping the screen — namely “let’s get more conservative” after the drop — click the mouse a couple of times, and done — or let’s get more aggressive after it looks better — click, click. done.

I don’t wish anyone ill, but I’ve met thousands of investors too, and have experience that’s much longer than 128 weeks and have seen this played out time & time again. This behavior is a perfect example of how this “easy online-approach” doesn’t work, usually at the worst times, when you’re simply not rational. And even if these firms are proactive in communicating warnings online, the drowning dopamine drenched brain simply doesn’t care in a market that’s highly correlated and only seems to go up, every dip in the last 128 weeks has worked itself out like a family sitcom — happy endings quickly and cleanly. The sad reality is these firms are just simply ignoring reality.  The human brain is hard-wired to experience actual physical pain when there are financial losses. That’s not something millennials have evolved beyond — they just haven’t lived through enough yet, with real money on the line.

Greed and Fear.

Greed and fear are the two biggest mental obstacles to manage for EVERY investor. And it’s the limitation of today’s technology solutions.  Addressing that…even if these firms do have a dialogue box process in place that says “Are you really really sure?” You’ll say, “Hell yes” — Click confirm(ation bias).

At the end of the day these platforms are good at solving a very small part of the investing process, and ignoring what makes simple investing so complex…. human nature.


How much is a text box or graph going to calm a scared investor’s lizard brain? It’s the equivalent of you agreeing to the Terms of Service on pretty much every new iThing you (and I) own. And that’s investor mistake 101 stuff.

Really, if you think about it, it’s actually kind of sad and depressing to see so many world-class MBAs and engineers are working on the least common denominator when it comes to the real issues facing investors. And advisors, because salespeople have pretended to be advisers for decades, generally do get a wrong-headedly, broad-brush-strokes bad rap… But if you really look at what a real adviser adds to the equation, it’s not small when it comes to an investor’s portfolio (an adviser who isn’t selling, but telling).

Here’s some research by Vanguard on the topic:

Screen Shot 2015-03-04 at 7.22.15 PM

Source: Vanguard


Behavorial Coaching… the single biggest value-add to a portfolio, And that’s something no website is going to solve, probably ever.

Almost ironically, Wealthfront illustrated that their clients aren’t any different than most investors left to their own devices on the behavioral-bias front — they buy high and sell low too.

Screen Shot 2015-03-04 at 4.44.02 PM

Source: Wealthfront

Now I want to take a moment to paint a bigger landscape for you about how these firms are positioned in the current environment.

Right now these firms are all pretty darned aggressive. Maybe that’s a function of what their clients’ can handle risk-wise, or maybe it’s simply how these clients feel about the market right now… It’s impossible to say, because all these platforms have grown up in a bull market — and 128 weeks of data may be considered statistically significant in the lab, but 128 weeks is not anywhere near statistically significant in the real world of investing.

Everyone is a genius when we’re in a bull market.

For more on the big three robo-firms allocations, Here are the firm-wide snapshots of how each of these firms are invested as of 12/31/14: Betterment, FutureAdvisorWealthFront.

Fifty-one percent of all investors believe a virtual advisor service should cost between 60 and 90 percent less than a traditional financial advisor. — Spectrem Group,”Wealthy Investors and Their Perceptions of Virtual Advisors”

What the findings of all these reports tell me is two things: 1)The actual online process isn’t that valuable. A questionnaire, digital signatures, some Vanguard funds and some rebalancing software… that’s why these platforms are so “cheap”; 2) Having a trusted adviser is absolutely EVERYTHING.

Think about it like this: Why do you think Apple has storefronts instead of just a website and cool commercials?

Because people need people. People want to see & feel the product — but they also want to test it and ask questions and get answers from an expert standing in front of them, watching facial cues, listening to questions answered thoughtfully. This is a big part of why I gave up on Microsoft machines a long time ago. 

And sure, “millennials don’t have a place to go with their $10,000” is an argument to validate these firms’ existence; it’s also an argument that’s completely lost on me because it’s simply not true. Someone with $10,000 could go to Vanguard right now, buy a target dated fund (for much less than they’re paying these online advisors) and be done — again the snazzy rebalancing and tax-loss features aren’t really that big of an advantage for the investor, especially with money under $100,000 (and probably any of those benefits aren’t realized until the portfolio balance is MUCH higher). And giving you the instant gratification of clicking up and down…. results may vary. But that’s not sexy, or nearly as exciting; I get it.

Now that same Spectrem report I quoted earlier went on to say that most of these people still consider themselves “advisor-dependent” — meaning they are depending on these online platforms to steer them right — but are they?

Meanwhile maybe these robo-clients do have real-world advisors who are their friends or colleagues, and maybe the professional advisers out there are too busy to care with their pretty websites full of aspirational ponies, mountains, and white people… with those amazing mortgage calculators and market tickers, and even a client login. And Y2K compliant??? Amazing!! And, of course, there’s that super-duper amazing ‘Contact Us’ email form too.

So, if you do care, Mr. and Mrs. Real Adviser, you’ll need just a few things to remain relevant and compelling, and maybe you’ll even get a few new clients in the process who value your approach and expertise.

And if you’re an investor  — come back for more, I’m just getting started.

There’ll be more in Part 2 of this guide…A guide on the tools you’ll need.  And more still about what these firms are lacking (probably in parts 3-100)…to be continued.

Part 2: Your Bionic Toolkit


Read More:

Advisor or Adviser?

Your Stockbroker: The Alpha

What Millennials Want (Or, How You Can Win Their Business)

While You Were Busy Sleeping, Vanguard Wasn’t…

18 thoughts on “Your Guide to Understand (And Compete With) Robo-Advisors

  1. brettalexander

    This is a brilliant analysis. Any adviser with long-term experience working with clients over multiple market cycles and environments realizes, at the end of the day, that our job is keep the client from making the “big mistake.” Everything else is marketing fluff. This is particularly critical for those folks nearing or in retirement. The young investor might and will likely recover. The client nearing retirement or in retirement will not. And let me tell you, I am a Riskalyze user and it is a great tool, but a score of 53 becomes a score of 5 when the bullets start flying. My mentor told me over 20 years ago, “Every investor is like a POW, they have a breaking point.”

    Even with brilliant tools such as Riskalyze and along with the most well worded Investor Policy Statement and best financial plan, the only way to really know a client is through a long-term relationship over multiple market cycles. Any long term adviser with long-term relationships can tell you with near 100% accuracy what clients will call them at 10% correction and what clients will call them at a 20% correction. There is a heck of a lot of difference between the panic of a 40 year old and the panic of a 65 year old. And never discount the level of fear. I have had more than one combat veteran tell me that the thought of a loss of life savings is close to the fear of combat. Our job is to know how our clients will react before they “get there.” “Well, at least I am only paying .15%” ain’t gonna cut it.

    And don’t think for one minute protecting the downside is the only challenge. The same clients that are scared at the bottom are the same that want to own Chipolte and Gold and Iomega at the top.

    We haven’t even talked about clients with diminished capacity or a client who just lost a spouse and doesn’t even know where the check book is located.

    For advisers who have an opportunity to service young investors with small accounts there is a simple solution. Take them on for free. Charging their account $5 a quarter, for an established, healthy firm is a disgrace. If the young person is related to your main client, you should be doing it anyway. The goodwill is priceless.

    I do think the robo craze will eventually serve a niche investor class and will do it very well, but at the end of the day, the robo-model has the same problem that any past model has had that has centered around “on-line” access model, such as accessing one’s 401k in real time and the retail/discount brokerage client refreshing their account 10 times a day, and that is there is simply no final barrier at each client’s maximum fear point.

  2. tw

    The value of the advisor vs robo that you did not mention is having someone to blame when things go sideways. The robo route requires an investor to take resposibility for their decisions and actions, an uncomfortable position when you are wrong.

    I think this one factor is also forgotten during “good times”. The investor can’t sue themselves on the basis of suitability.

  3. Pingback: 03/09/15 - Monday AM Interest-ing Reads -Compound Interest Rocks

  4. bwrandall

    Thanks for your post. I look forward to Part 2. I agree generally with your analysis: all this uptake and AUM gathering and positive press has occurred during a relentless market upturn; let’s reserve judgment until a full market cycle (that includes a 20% pullback in the S&P 500) is complete.

    As one of the Wealthfront “Geniuses” (sorry – I hated the term) I have a particular perspective on this. And now my firm and I are with semi-robo advisor Covestor, doing almost exactly what Wealthfront tried and failed to do not more than three years ago before they pivoted to Wealthfront v 8.0 – merely the most recent of about seven pivots they’ve executed since starting, as you noted, as a Facebook game back around 2007.

  5. Pingback: What a Great Time To Be An Investor! – Meb Faber Research – Stock Market and Investing Blog

  6. Pingback: 10 Wednesday AM Reads | The Big Picture

  7. Pingback: connecting.the.dots

  8. BeatCal

    Three Points. (i) Wealthfront has 2B AUM. At 0.3%, that’s 6M a year in revenue. I agree, fees too low. (ii) No barriers to entry. (iii) Endgame is probably a takeout by one of the majors.

  9. BeatCal

    Question. What percent of “real” advisers would discourage a client from doing what Jason did?

  10. Pingback: Les onze articles que vous devez lire aujourd’hui |

  11. Pingback: Rooting For a Bear Market? - A Wealth of Common SenseA Wealth of Common Sense

  12. Pingback: We Interrupt This Program To Bring You… RoboWars | I ❤ Wall Street.

  13. Pingback: Free Intelligent Portfolios by Charles SchwabFamily, Personal Wealth & Tech, A Simple Life!

  14. Pingback: Robot tanácsadók | lustaport

  15. hawaiianwaverider

    Great article, and comments by all.

    Is this to the benefit of the individual investor? As an advisor managing money through cycles back to ’97 (tactically), I understand my clients, their real risk tolerance and how quick and deep markets can fall.

    I propose these investors will have a rude awakening when they are expecting some “intelligent risk management” when the market turns down and they won’t get it. Wealthfront’s 128 week statistical risk modeling is comical.

    But the fees are super low. Amazing how expensive low fees can cost.

  16. Dan

    This does not convince me that human advisors are better than Robo advisors at all. Also the Robo advisor I have been working with analyzes the trends of the global market since the dawn of the markets themselves with decades of statistical analysis to sight. So I don’t buy the argument that their view is somehow short sighted. Keep in mind folks stock market data is public knowledge, to think that only a select few of people possess the knowledge and skill to navigate through the investing arena is exactly why Robo advisors were created. Just a suggestion maybe instead of criticizing Robo advisors for costing so little to implement maybe human advisors should lower their costs so everyday investors can afford the service.

  17. iheartWallStreet

    Thanks Dan. To be clear, I don’t think just a few have the knowledge… but they do have the experience and that’s not a small advantage. I do think most investors would benefit from having that check and balance in place, vs. being able to simply ratchet risk up and down in a portfolio, but we can agree to disagree — that’s okay. That being said, I totally agree that the pricing model needs to be adjusted with regard to using human advisors, and I’m pretty confident we’ll see that sooner than later.

Comments are closed.