Unconvincing Robo Advisers’ Real World Track Record – The Robotic 800 Pound Gorilla In The Room

There are plenty of obvious upsides that a well executed robo advice service can deliver. The elevator pitch is that robo advice can provide professional diversified wealth management expertise to a massive group who are either currently financially unable to afford existing options or who are not impressed enough with more traditional advice to justify making the leap from a DIY approach.

Robo advice can provider lower and more transparent fees, increased simplicity and a proposition in tune with the ever increasing appetite of tech savvy Millennials, Generation X/Y/Z and even Baby Boomer ‘silver surfers’ for the provision of slick efficient technology solutions to meet their needs.

HOWEVER Robo advice is not a wealth management silver bullet. The 800 pound gorilla in the room is a lack of confidence in typically relatively unproven underlying portfolios with limited real world track record. Investors need to feel entirely comfortable with the actual performance over an extended period of time of the specific portfolios their money will end up in including how the thing will stand up to acute and chronic market stress. However many of the robo firms cannot provide this peace of mind because their firm is relatively new.

 

Cyborg Gorilla

Robo advice firms typically try to address this shortcoming by espousing the CVs of the discretionary teams behind the portfolios or the eggheads who have built the algorithms that power the asset allocation of the more automated robo advice firms.

A significant degree of caution is advisable here. The list of asset managers that have claimed to have previously constructed portfolios that were ‘the next best thing since sliced bread’ as a marketing hook for a new set of portfolios which have then not delivered is long and distinguished.

The obvious remedy for this particular issue is to be wary of “simulated” or “historically projected” performance that show appetizing returns that ‘would’ have been achieved if the money managers had been running the portfolios the robo proposition offers.

There is no substitute for investing into the very portfolios that have an extended real world track record. There are robo asset managers that have managed to eke out impressive annual returns in the actual portfolios that the robo feeds directly into over a period that includes the 2008 crisis. Seek these firms out.

It’s worth noting that in the scenario where an existing financial adviser is white labelling the services of a robo partner provider, then the investor must be able to look through and interrogate the real world credentials of the firm that will actually be making the investment decisions.

Author: Simon Bottle

Simon Bottle consults on Marketing, Product Development, Sales, Client Services and Efficiency Re-engineering projects.