4 years ago, Obama was President of the United States and Stephen Harper was Prime Minister of Canada. A Liberal was running America and a Conservative was running Canada. The New England Patriots were still making it to the Super Bowl, even winning a few…
…and I had opened my Robo Advisor account.
Yes it been a full 4 years since I opened up my Robo Advisor account. For those new to investing, a Robo Advisor is a new wave of wealth management companies that invest on behalf of others using an online platform and a combination of algorithms and computer coding to buy and sell specific investments and manage portfolios. Four years ago these firms were just stepping into the investing conciousness, but since then they have mushroomed and even traditional investment companies are now offering some flavor of online investment management services. It all seemed quite appealing however there was one thing that many marketing materials, blogs, and mainstream media was avoiding (and still are I might add)…do these types of services make money for investors?
Since no robo advisor company back then was interested in disclosing their performance (they still avoid it) other than citing research that their strategy is superior, I decided four years ago to try an experiment and find out for myself. I setup an account with one of the big Robo Adviser firms. My goal was to go through the process and blog about my experience and more importantly, the results. I’ve always said that we need a good five years to really get a handle on how effective these services are compared to traditional wealth management services. Well, we’re at the 80% mark of my ROBO journey, so let’s check back in and take a look at how it’s doing now and see if we can squeeze any conclusions about the service.
In previous years, I have stated that for us to get a real handle on their effectiveness, we need to see these robo-portfolios experience some stress. Up until 2018, the markets have been quite tame. We’ve seen how these portfolios operate in a period of rising stock prices. In 2018 we finally hit some periods where there were major swings in stock prices around the world. In February we saw the Dow Jones on several days drop more than 1000 points and in December we had the Christmas Eve Massacre where stock prices fell off a cliff creating a lot of hand wringing over the Christmas break. Finally meaningful, although short-term stress points for the ROBO portfolio.
Below is the current status of my ROBO portfolio as of January 30, 2019 and below that is the chart of annual returns over the past four years.
The first year was a rough one for ROBO as it had lost 2.15 percent. In the second year and third year, ROBO picked up its game. The portfolio generated a 13.2 percent return in Year 2 and in Year 3 it posted another solid year with a 14.2 percent return. In 2018, the portfolio pulled back going down a total of 2.1 percent. The loss was tempered by dividends where the portfolio generated $142.91 in dividend income. The ROBO was also saved a bit by a strong rebound in stock prices in January coming off the correction in December. The losses could have been much worse. Considering the largest component of the ROBO portfolio was concentrated in US and Canadian stocks and where the S&P500 and TSX/S&P Composite were down 6.3 and 11.7 percent respectively in 2018, a 2.1 percent drop is very reasonable. I lost money but not as much. Since January 2015, the portfolio is up 22 percent over the last 4 years.
When I setup the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt was compatible with my profile. As I am pretty experienced with investing and have a long-term investment horizon, ROBO determined that a portfolio mix of 85 percent stocks and 15 percent bonds would work for me. It has since then retained the same stocks/bonds ratio. From there ROBO carved out allocations to a variety of equity assets using ETF's to provide the appropriate exposure. Below is the most recent allocation and performance.
Back in January 2016, almost every asset class was losing money. Now every equity asset class is in the green. The best performer has been the US equities ETF’s which are up 38.3 and 11.3 percent respectively since inception. It appears the ROBO’s decision to increase the weighting in US equities has paid off, although there have been periods in the past year where it was tenous. Emerging Market and other Foreign Equity components were also pretty solid. The laggard continues to be the Canadian Equity ETF, posting a 2.8 percent return since inception. Increasing the Canadian Equity weighting has so far not proven to be a great move by the ROBO. The bond components while small have been the worst performers, both posting negative returns.
Over the course of the past year, the portfolio has been quite stable in terms of asset allocation. Unlike the early years where there was a fair bit of rotating between different asset classes like real estate and low volatility ETF’s as well as changes in the asset allocation of the Canadian and US Equity components, the portfolio has stayed pretty constant. This is a good thing. There was a fair bit of tinkering around and it has now evolved into a simpler portfolio that consists of low cost ETF’s that are tracking broad market indexes.
The portfolio continues to skew heavy into US and Canadian equities. Right now almost 56% of the portfolio is invested in US and Canadian equities, which to me is quite high. The US portion now has 2 ETF’s that invest in the same basket of US stocks, which I continue to look at in bewilderment. There were no changes in the types of ETF’s owned, which is the first time in the 4 years that the portfolio makeup and weightings were constant. Hopefully ROBO has now settled into a bit of a groove and will keep things stable. Ironically it has taken 4 years to get to this point.
ROBO is much more transparent in terms of fees it charges itself as well as the fees the individual ETF’s charge which is good to see. In the last year I paid directly to my ROBO a total of $37.36 in fees which is up/down from the $24.72 in fees I paid last year which was higher than I paid in 2016 where I paid a total of of $10.84 in fees to the ROBO.
So while my portfolio dropped 2 percent, my costs increased over 50 percent to 0.61% of total assets. Last year it was 0.39%. When you add in the Management Expense Ratio (MER) of the individual ETF’s which represents approximately 0.09%, we get a total cost of 0.70% of the portfolio which is higher than in 2018 where my total costs came in at 0.49% of the portfolio.
So why are costs rising so much? It turns out that my ROBO made a change in their fee structure. When I opened the account, the ROBO charged no fees for the first $5,000. It’s a reason why I deposited the minimum to factor out any costs in my evaluation and observations. Under the new fee structure, the ROBO charges 0.5% on first $100,000, so I’m now paying the 0.5% on the whole $5,000. If I invested over $100,000 then the ROBO would charge me 0.4%. I’m curious though why the 0.61% is higher than the 0.5% posted rate. Where did this 0.11% leakage come from? Also I don’t recall ROBO informing me of the change in the price structure, although it is posted on their website. I do recall the ROBO publicizing their new tiers of service but it didn’t land in my Inbox. I’ll give them the benefit of the doubt. The fees are still much lower than what you would pay for a portfolio of mutual funds.
Still waiting for human contact
Over the past year I made no contact with my ROBO service and other than some emails I heard nothing from them. My last contact with a human was in 2016, when I called to get an explanation on the new asset weightings.
When the markets were behaving badly in February and December of 2018, I would get a Keep Calm email and that everything will work out.
I’m not really bothered by it. It’s what I’ve come to expect in this type of platform. If you are a person who needs that human contact or sounding out board this service model could prove hard for you.
I’m continuing to be fully invested in the market and I’ve made a more than decent return. Beyond that there isn’t much else I’m seeking. As long as I’m making money and my costs are low, it’s all good.
New Contestants Emerge
Over the past year there have been some interesting developments in the wealth management spacement. The most intriguing is the introduction of the Asset Allocation ETF products by Vanguard. Essentially it is a single ETF that contains a basket of different Vanguard ETF’s that invest in specific broad market indexes and bonds. You can now have a fully diversified portfolio buy owning a single stock. You can buy them with different asset allocations such as Growth, Balanced, and Conservative. They invest in the same ETF’s but the amount invested varies according to a generic risk profile. The kicker is Vanguard is charging an MER of 0.22 percent which is much, much lower than what my ROBO is charging me to execute a similar investing strategy. More companies are entering this space. Recently iShares introduced a similar line of ETF’s and it won’t be long until the banks and mutual fund companies come up with a similar line of ETF’s.
Charging me 0.22 which is much higher than what I’m paying for my ROBO which is charging me at minimum 0.70% for pure management and execution of my portfolio without any advisory service is a pretty compelling pitch. The outlier is that like online investing portfolios that came out 4 years ago, there isn’t much of a track record to show how efficiently they perform. Sounds like another future investing case study?
4 Years In: NOW what do you think?
When I started this exercise, I said we’ll need at least 5 years of performance to get a decent idea about how viable the ROBO advisor model is. We’re into the home stretch now and I’m starting to formulate some impressions about this type of investing service model. Last year I shared some observations and takes and they continue to hold true. I’m listing them below plus a few more additional observations from the past year:
I have to stress again that my conclusions are based on my own single experience with using a single ROBO service under my own personal circumstances. My experiment is by no means scientific.
The results show that when the markets are humming along nicely, a Robo Advisor service appears to tag along for the ride and while it may not outperform the market (and that’s OK), it is appears to generate a very reasonable rate of return under good market conditions.
While a ROBO portfolio uses low-cost ETF’s that invest in broad market indexes, it is managed very actively. In the 3 years I’ve had the portfolio, my ROBO has made changes in the asset allocation 3 times and has turned over 75 of the portfolio. So if you expect a “set-it and forge it” strategy, you won’t find it here. If this is the case how is this any different from doing this yourself or working with a traditional advisor?
Compared to a traditional mutual funds, the Robo Advisor service is cheaper.
In the past year I have observed that:
As much as algorithms and formulas are supposedly “managing” these portfolios, at the end of the day, it is a human that is driving these decisions. It has taken 4 years of tinkering to get my ROBO portfolio to this point. Isn’t the point of these portfolios to take away the temptation of tinkering and churning? Individual investors are more prone to this behavior but a professionally managed portfolio that claims to espouse principles of passive/low cost index investing should not behaving this way.
I commented in the past about how ROBO services can make a profit out of this. When they came out, the service was purely about portfolio management and it was targeted to the younger demographic. That segmentation has been completely abandoned over the past four years. ROBO services are targeting where the money is and where the traditional investing industry has been targeting….high net worth clients. The stable of services or swag has been expanded. Opening an account and getting a toaster or a solar-powered calculator has been replaced with a free Spotify account.
The ROBO’s have finally been tested on how they operate in periods where stock prices are falling rapidly. Based on the pullbacks we saw over the past year, the ROBO appeared to stay true to its investing strategy and did not engage in sudden selling and rotation into other assets, which is behaviour that most individual investors would likely engage in. That’s a positive thing and if it means paying some extra basis points to prevent us from getting in our own way then it may be a small price to pay for some element of investing discipline.
These services need to be battle tested if they can demonstrate a capability to weather the storms and preserve investors capital, then they have a pretty good opportunity to entrench themselves as a viable investing platform. So the journey continues with my ROBO. On to year 4.
Past posts about my Robo Advisor Case Study