Download Robo-advisors have yet to be tested

Robo-advisors have yet to be tested
Fraser Betkowski
Hilliard’s Weekend Notebook – Friday April 14, 2017
The latest competitor in investment management is the online portfolio manager –
colloquially known as a robo-advisor. These platforms build a portfolio of exchangetraded funds (ETFs) for investors on the basis of a short questionnaire.
While convenient and low-cost there are problems with relying on this technology.
Designed for investors with a small amount of investable assets, robo-advisors aim
to reduce costs by keeping service and staff levels low. These platforms further
mitigate costs by outsourcing investment management via the use of ETFs.
The robo-advisor’s simplicity is appealing. You answer a questionnaire then your
portfolio is built. For a novice investor during a stretch of market gains in the U.S.
and Canada the passive robo-strategy is sound.
But what happens when the market corrects?
In order to track their respective indexes, index-following ETFs need to hold a
proportionate amount of the largest constituents.
With this in mind, Canadian investors should question if they really want to put most
of their money into the largest and most expensive companies in the domestic
index:
Top 10 stocks in S&P/TSX
Market Capitalization
(As of mid-day 04/11/02017)
(Millions of CA$)
Royal Bank of Canada
Toronto Dominion Bank
Bank of Nova Scotia
Enbridge Inc.
Canadian National Railway
Suncor Energy Inc.
Bank of Montreal
BCE Inc.
Transcanada Corp.
Canadian Natural Resources
$143,352
$123,533
$93,936
$93,131
$75,445
$69,748
$65,106
$54,281
$54,906
$50,411
Source: Thomson ONE
Richardson GMP
10180 101 Street, Suite 3360
Edmonton, AB T5J 3S4
Tel. 1.780.409.7735
Fax 780.409.7777
www.TheMacBethGroup.com
Fraser Betkowski
Associate Investment Advisor
Tel. 780.409.7734
As an experiment to test the system, I answered the questionnaires and built mock
portfolios using three robo-advisors.
A bank-owned one asked ten questions, all pertaining to my investment objectives
and nothing about my personal circumstance. Then it spat out a portfolio of
proprietary products.
The two independent platforms were better. Both asked about my personal situation
and attitude towards investment. They also provided the individual ETF constituents
in my selected portfolio. I liked the depiction of risk of the available portfolios from
the second independent:
Source: Leading independent online portfolio manager
But how prepared are clients to actually handle this kind of downside? And while
these services provide access to a person to talk with, it’s not someone you trust.
When a position corrects 15.6% that’s one thing but if an entire portfolio goes
through this, clients expect answers and fast.
If the trusted human advisor describes something along the lines of what happened
in 2008/09 and the client holds on and adds to diminished positions, they would be
handsomely rewarded. The person invested with the robo-advisor would be
discouraged and likely unwilling to re-enter the market at an opportune time.
This is the problem with how the public perceives what an advisor is. An advisor
should be a coach who knows you rather than someone who just picks stocks.
David Chilton, author of The Wealthy Barber calls robo-advisors ‘robo-asset
allocators’ because that’s all they do. As was verified for me in the bank roboadvisor questionnaire there’s no question as to whether I hold a $600,000 mortgage
or have $10,000 in credit card debt. If I did, it would not be wise to aggressively
invest in a US small-cap ETF.
The robo-approach is highly automated giving them some advantages in
administration of accounts but their ability to truly know their clients is limited. This
ultimately puts clients at risk because all of their needs are not being met.
Will the robo-advisors survive? We’ll learn more after they experience their first
market correction.
Fraser Betkowski
Fraser, The MacBeth Group team and their clients may trade in securities mentioned in this blog.
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