What we know about robo advisors

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jbolden1517
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What we know about robo advisors

Post by jbolden1517 »

Coming off the robo advisors thread I think a thread that acts as a reference (for now and the near future) on what we know about robo advisors and where to get more information might be useful. There is a lot out there and I don't think its organized. I for one still have lots of questions and I've thought about this topic quite a bit. So hopefully some of you will join me in putting together a reference thread. I'll add some posts below this one with results from my own studies.
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Re: What we know about robo advisors

Post by jbolden1517 »

First off sources of information.

BackendB (was/is a division of Condor Capital Management) runs sample portfolios both conservative and aggressive taxable and tax free with about a dozen robo advisors. They publish an annual and quarterly version which is quite detailed as to relative performance and strategy. The report is available free of charge at https://theroboreport.com/

Investmentzen has a short information page: http://www.investmentzen.com/best-robo-advisors

ETF.com has a nice information page where they compare a variety of portfolios: http://www.etf.com/sections/blog/22982- ... nopaging=1

Blackrock wrote a nice report on the services. Focus is sell side (how to meet ethical / legal obligations) not buy side so likely not terribly useful but I thought I should list: https://www.blackrock.com/corporate/en- ... r-2016.pdf

Please feel free to add.
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Re: What we know about robo advisors

Post by jbolden1517 »

The non-mainstream choices I know about


Thought a list of some of the more interesting robos out there would be worth doing.

Hedgeable: https://www.hedgeable.com/
They use a core satellite approach and dynamic allocation based on current market conditions. This sort of approach is typical of pension funds using hedge funds as satellites (hence the name). They are trying to create a private wealth type service that works well for 5-7 figure accounts.
They provide a detailed discussion of their philosophy: https://www.hedgeable.com/research/white-papers
fees are between 30 ($1m+) and 75 ($1-$50k) basis points over the prevailing investments They are aggressive in finding low correlating assets using commodities, private equity, bitcoin...
As the account grows they gradually get more sophisticated:
  • Core satellite kicks in at $100k and meaningfully kicks in at $250k
  • At $500k they start using individual stocks to represent asset classes and thus create more opportunities for tax loss harvesting
  • At higher numbers they start making direct private equity available
Covester: http://covestor.com/ (soon to be Interactive Broker Asset Management)
You pick weightings among 42 investment advisors, hire investment advisors at approx (8 basis points) and trades in your brokerage account are pooled with other covesters. The trades are made simultaneously as a pool with Interactive handling the execution (they specialize in good executions). You can still trade in the account on your own (so overriding the advisor). IMHO these are sort of like mutual funds you are allowed to tweak.
$5k min per asset class (though some funds have much higher minimums)
42 strategies (with many more offered once you hit $2.1m under management)

Motif: https://www.motifinvesting.com
Motif is sort of a cross between mutual fund family, a robo advisor and a broker. With their service you can trade stocks and etfs or buy portfolios of of up to 30 stocks & etfs in what's called a "motif". You can also create your own motifs and share them (web 2.0 style). Those portfolios can act like a mutual fund or be total portfolio weightings. Motif buys are $9.95. If you want the robo advisor service it is about 23 basis points ($19.95 / mo per $100k). Investing into your own allocation is free, manual rebalances are $9.95. Rebalances for professional portfolios are free.
Last edited by jbolden1517 on Mon Jul 17, 2017 7:31 pm, edited 4 times in total.
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Re: What we know about robo advisors

Post by pkcrafter »

Thanks for putting this together.

Here's another reference

Investment News: When it comes to investment returns, not all robos measure up

http://www.investmentnews.com/article/2 ... measure-up


Paul
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Re: What we know about robo advisors

Post by 4nwestsaylng »

following up on my previous thread " 3 fund vs robo advisers", finally decided today to go with Schwab Intellgent Portfolios for a portion of my taxable account. I like the interface and the transparency. Cash requirement 8.5% of the 30K I am starting with, but it will get a basic MMF rate of the sweep account, yes they make money on it, but in a year I will look at total return, including the idle cash.

May also put a portion in a 3 fund for comparison, or in Lifestyle. I am in the 25% max marginal tax rate so not really worried about the fixed income in the taxable account, etc.

We will see how the robots work!
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Re: What we know about robo advisors

Post by redstar »

jbolden1517 wrote: Hedgeable: https://www.hedgeable.com/
They use a core satellite approach and dynamic allocation based on current market conditions. This sort of approach is typical of pension funds using hedge funds as satellites (hence the name). They are trying to create a private wealth type service that works well for 5-7 figure accounts.
They provide a detailed discussion of their philosophy: https://www.hedgeable.com/research/white-papers
fees are between 30 ($1m+) and 75 ($1-$50k) basis points over the prevailing investments They are aggressive in finding low correlating assets using commodities, private equity, bitcoin...
As the account grows they gradually get more sophisticated:
  • Core satellite kicks in at $100k and meaningfully kicks in at $250k
  • At $500k they start using individual stocks to represent asset classes and thus create more opportunities for tax loss harvesting
  • At higher numbers they start making direct private equity available
Hedgeable's downside risk protection looks interesting, but there really doesn't seem to be enough data to say whether it works (as we need bear market to test it). These are the past two forum discussions I've found on it:
4nwestsaylng wrote:following up on my previous thread " 3 fund vs robo advisers", finally decided today to go with Schwab Intellgent Portfolios for a portion of my taxable account. I like the interface and the transparency. Cash requirement 8.5% of the 30K I am starting with, but it will get a basic MMF rate of the sweep account, yes they make money on it, but in a year I will look at total return, including the idle cash.

May also put a portion in a 3 fund for comparison, or in Lifestyle. I am in the 25% max marginal tax rate so not really worried about the fixed income in the taxable account, etc.

We will see how the robots work!
It would be great if we could get some sort of crowdsourced Bogleheads comparison of the performance of these robo-advisors, as it is hard to compare them with available public data. I guess they would have to have similar risk settings to compare, though.
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Re: What we know about robo advisors

Post by jbolden1517 »

redstar wrote:
Hedgeable's downside risk protection looks interesting, but there really doesn't seem to be enough data to say whether it works (as we need bear market to test it). These are the past two forum discussions I've found on it:
First thread is quite good! Excellent link
redstar wrote: It would be great if we could get some sort of crowdsourced Bogleheads comparison of the performance of these robo-advisors, as it is hard to compare them with available public data. I guess they would have to have similar risk settings to compare, though.
We have that. First link in this thread: https://theroboreport.com/
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Re: What we know about robo advisors

Post by redstar »

jbolden1517 wrote:
redstar wrote: It would be great if we could get some sort of crowdsourced Bogleheads comparison of the performance of these robo-advisors, as it is hard to compare them with available public data. I guess they would have to have similar risk settings to compare, though.
We have that. First link in this thread: https://theroboreport.com/
Yeah, I just meant more examples, as it's my understanding that that report doesn't take into account some advanced features, like Wealthfront's TLH. By the way, is there any way you've could share that report? I signed up on the site but they haven't sent it to me yet.
Last edited by redstar on Mon Jul 17, 2017 7:16 pm, edited 1 time in total.
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Re: What we know about robo advisors

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (robo-adviser).

jbolden1517 - I can't believe we don't have this in the wiki, which is where content like this belongs.

I created a draft page: User:LadyGeek/Robo-adviser

First, let's start from an authoritative source, the SEC. I added some introductory content, along with links to content that should be added to the page. Since the SEC uses "robo-adviser", let's go with that spelling.

The next step is to organize the content in this thread and put it into the wiki.

Bear in mind that the wiki can only use content that's publicly available. Information gleaned from content needing subscription access (username / password) is generally copyrighted with restricted use.

The wiki is a collaborative effort. If anyone wants to become a wiki editor to work on this page, please PM me. Wiki editors are welcome to contribute directly.

Otherwise, anyone who wishes to submit content (suggested outline, wording), please post here.
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Re: What we know about robo advisors

Post by jbolden1517 »

LadyGeek wrote:This thread is now in the Investing - Theory, News & General forum (robo-adviser).

jbolden1517 - I can't believe we don't have this in the wiki, which is where content like this belongs.
I agree. Feel free to steal from this thread. I can't edit the wiki.
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Re: What we know about robo advisors

Post by LadyGeek »

^^^ The wiki is separate from the forum. PM me if you want access - I'm a wiki admin.

FYI - redstar is now a wiki editor.

The wiki uses the same software as Wikipedia. The more editors working on it, the better.
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Re: What we know about robo advisors

Post by LadyGeek »

I now have some time to work onUser:LadyGeek/Robo-adviser.

If anyone has further suggestions, please post here. Wiki editors can update the page directly.

Update: Page completed, see below.
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Re: What we know about robo advisors

Post by jbolden1517 »

LadyGeek wrote:I now have some time to work on User:LadyGeek/Robo-adviser.

If anyone has further suggestions, please post here. Wiki editors can update the page directly.
My big suggestion is links to articles on: rebalancing, tax-coordinated MPT, tax loss harvesting, cash flow management for retirement. Those are the sorts of big features they offer which are often a pain for investors.

I still owe a better description of some of the mainstream options. Not sure if you want subpages since those are likely going to get out of date fast.
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Re: What we know about robo advisors

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Thinking further, I think it is very important that new investors be introduced to robo-advisers from an authoritative and unbiased information source. There's no better authority than the SEC, which has a very good tutorial.*

I copied most of the tutorial, then beat it into shape for the wiki. Then, I added a table showing where you can get all the SEC filings for Betterment and Wealthfront - two very well known robo-advisers.

The content is "good enough" and is now in the "live" wiki, see: Robo-adviser

"Robo-adviser reviews" contains jbolden1517's list of websites.

"External links" contains:
- pkcrafter's article
- jbolden1517's link to the BlackRock 2016 report. From a top-level perspective, it's quite good.

* It also doesn't hurt that most US government websites have no copyright restrictions (paid for by tax dollars).
jbolden1517 wrote:...My big suggestion is links to articles on: rebalancing, tax-coordinated MPT, tax loss harvesting, cash flow management for retirement. Those are the sorts of big features they offer which are often a pain for investors.

I still owe a better description of some of the mainstream options. Not sure if you want subpages since those are likely going to get out of date fast.
Going "live" doesn't mean the article is finished. It's in a form that can be easily modified to add content.

There's no limit on the length of a wiki page. My only concern about "subpages" is that you think they are likely to get out of date fast. Do you have an example?

If anyone has links as suggested by jbolden1517 (or anything that looks appropriate), post here.

Comments / questions / suggestions are welcome.
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Re: What we know about robo advisors

Post by jbolden1517 »

LadyGeek wrote:doesn't mean the article is finished. It's in a form that can be easily modified to add content.

There's no limit on the length of a wiki page. My only concern about "subpages" is that you think they are likely to get out of date fast. Do you have an example?
An example, sure tax lost harvesting. 4 years ago this was a relatively rare feature. A few of the robo advisors really specialized in it, others figured that with broader index funds within a few years it wouldn't matter much. Today it is considered almost mandatory and essentially all of them offer it, though some charge extra. My bet is in 2 years they will all include it. After all it isn't hard for a computer to keep track of 1000 positions with fractional shares and multiple buy in dates and make modifications. Why have the sort of portfolio that a human could possibly manage if a computer is doing the work? Plus this is a sticky feature. Creating portfolios too complex to move via. an account transfer makes it harder for someone to leave a robo advisor. So as average asset sizes grow I expect this to become a differentiating feature with Bettermint.... doing the sort of more advanced tax lost harvesting that Hedgeable does. Which will mean that for most robo advisors the assets held in $1m + accounts will on the surface be very different than those for smaller accounts. 2 years from now we'll probably have multiple tiers of tax lost harvesting with each robo-advisor cutting in with more complex strategies at different tiers levels. The question for an investor will be "do I qualify at rob-advisor X for tax treatment Y"?
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Re: What we know about robo advisors

Post by LadyGeek »

Thanks, that's helpful. Without adequate resources, I fully agree the page will become obsolete very quickly. Additionally, two important points jump out.

First - It is important to keep perspective on what's important. Tax loss harvesting, for example, is an implementation detail. Unless all things are equal, you don't select a robo-adviser for tax efficiency. There are other more important considerations that must first be decided before you even get to this point.

(If your portfolio is entirely composed of tax-deferred accounts (IRA, Roth IRA, etc.), tax loss harvesting has no impact whatsoever.)

Does this perspective apply to your other "subpage" topics? Perhaps there's a way to make your point at a higher level.

Second - Your point of complex portfolios vs. difficulty of leaving a robo-adviser is good. Do you have any specifics? I think a section on trade-offs would be a good addition to the wiki.

==============
As for your "non-mainstream choices", I was unsure if they should be added to the wiki and did not do so. This is the same issue as the "subpages". How can one keep up with all the new robo-advisers? Instead, I let your link to What Is The Best Robo Advisor in 2017 do all the work, which is referenced in the wiki. Hedgeable is listed in the article.

==============

The page has been revised: Robo-adviser

- The questions have been formatted for readability
- I added info regarding fees, including an update to the SEC Filining table.
- Added a strong notice (blue box) that tax loss harvesting does not apply to tax-deferred accounts.

Bear in mind that all of the above is just my opinion. This is a collaborative effort. If anyone disagrees and would like to change the wiki content, please post here and I'll make the update. Any wiki editor is free to update the page at any time.
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Re: What we know about robo advisors

Post by LadyGeek »

davidkw just posted this: Your Robo-Adviser May Have a Conflict of Interest

Following a few links comes to this SSRN paper: Robo-Advisors: A Closer Look
Based on a detailed review of user agreements for three leading robo-advisors, this paper concludes that robo-advisors do not live up to the DOL’s acclaim. They are not designed for retirement accounts subject to ERISA and should be approached with caution by retail and retirement investors looking for personal investment advice.
The paper has some good points.

Another good reference: Automated Investment Tools | FINRA.org
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Re: What we know about robo advisors

Post by jbolden1517 »

LadyGeek wrote:davidkw just posted this: Your Robo-Adviser May Have a Conflict of Interest
I think that's the top of the ice burg: ways that brokerages can make money from robo-advisors, is really ways that sell side investors take money sideways. For brokerages front running and selling the order flow, using rebalancing as a synthetic put... can all be profitable to a brokerage. There is IMHO a lack of discussion of sell side issues on Bogleheads generally. Some of these like affect Vanguard more than others (like using indexing to create cheap financing), while most affect Vanguard less than others.
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Re: What we know about robo advisors

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jbolden1517 wrote:
LadyGeek wrote:davidkw just posted this: Your Robo-Adviser May Have a Conflict of Interest
I think that's the top of the ice burg: ways that brokerages can make money from robo-advisors, is really ways that sell side investors take money sideways. For brokerages front running and selling the order flow, using rebalancing as a synthetic put... can all be profitable to a brokerage. There is IMHO a lack of discussion of sell side issues on Bogleheads generally. Some of these like affect Vanguard more than others (like using indexing to create cheap financing), while most affect Vanguard less than others.
My best guess is that if the big brokerages abused this too much that there would be large investor lawsuits and probably SEC action. If a firm used its robots to, in effect, skim their customers, at some point the regulators would step in. It would be harder to prove that humans are skimming their customers but when you write the skimming into the programs and algorithms, it would be pretty much an open and shut case in courts.

Not saying this won't happen but for one thing, front running is illegal. I can think of a famous mutual fund manager who was fired by his firm for doing just that, the guy personally was front running the mutual fund he was managing.

The robots need to make money for their companies, no problem with that, but they need to get that from their fees and to be transparent. Brokerages could also make money by allocating a portion of the portfolio to cash and by portfolio lending, that is lending securities to those executing shorts. There are hidden ways to make money but you have to be certain you are not violating securities laws in order to do that.
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Re: What we know about robo advisors

Post by jbolden1517 »

nedsaid wrote: My best guess is that if the big brokerages abused this too much that there would be large investor lawsuits and probably SEC action. If a firm used its robots to, in effect, skim their customers, at some point the regulators would step in. It would be harder to prove that humans are skimming their customers but when you write the skimming into the programs and algorithms, it would be pretty much an open and shut case in courts.
We know people get paid for order flow. The SEC requires disclosure and they do disclose. The trades are executed by computers today. If people are paying a lot for it, of course order flow is valuable. I can think of obvious ways to make money from flow.
nedsaid wrote: Not saying this won't happen but for one thing, front running is illegal. I can think of a famous mutual fund manager who was fired by his firm for doing just that, the guy personally was front running the mutual fund he was managing.
That's very different. That's taking money for personal gain from investors in an undisclosed way. Totally illegal.
nedsaid wrote: The robots need to make money for their companies, no problem with that, but they need to get that from their fees and to be transparent. Brokerages could also make money by allocating a portion of the portfolio to cash and by portfolio lending, that is lending securities to those executing shorts. There are hidden ways to make money but you have to be certain you are not violating securities laws in order to do that.
Agreed.

FWIW my personal opinion is that companies should just be precluded entirely from being on both the sell side, trading for the own book and buy side. These should be 3 classes of companies. The conflicts of interest between these 3 roles are just impossible to navigate successfully, and we should stop trying to ignore the obvious.
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Re: What we know about robo advisors

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jbolden1517 wrote:
LadyGeek wrote:davidkw just posted this: Your Robo-Adviser May Have a Conflict of Interest
I think that's the top of the ice burg: ways that brokerages can make money from robo-advisors, is really ways that sell side investors take money sideways. For brokerages front running and selling the order flow, using rebalancing as a synthetic put... can all be profitable to a brokerage. There is IMHO a lack of discussion of sell side issues on Bogleheads generally. Some of these like affect Vanguard more than others (like using indexing to create cheap financing), while most affect Vanguard less than others.
The wiki has been revised. See: Robo-adviser

- That SSRN paper was an eye-opener in terms of robo-advisers not meeting the ERISA fiduciary standards. It's now in the wiki under "Further reading".

- After reading that paper, I realized that I had totally missed the significance of the SEC's investor alert for automated tools. The alert is now in the wiki as a new "Risks and limitations" section. I copied most of it (no copyright restriction...) as each point is important. Note that "Ask an automated investment tool sponsor whether it receives any form of compensation for offering, recommending, or selling certain services or investments." is in the first point.

As for a lack of sell side investing discussions, it's probably that most of the readers here are focused on the buy-side of the equation. Feel free to start a few discussions, as I don't have any experience to start one myself. If education is needed, we can certainly write a wiki article to cover it.
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Re: What we know about robo advisors

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pkcrafter wrote:Thanks for putting this together.

Here's another reference

Investment News: When it comes to investment returns, not all robos measure up

http://www.investmentnews.com/article/2 ... measure-up


Paul
Instead of little kids bragging that "my dad can beat your dad," we will see grown adult investors bragging about the comparative investment prowess of their robots. I await the "my robot beat your robot" threads.
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Re: What we know about robo advisors

Post by patrick013 »

Seems Ally Investments has improved their Robo in some ways.
After a very short questionaire you're assigned Conservative to
Very Aggressive portfolios. Mine was just plain Aggressive with
80/20 AA. iShare and VG ETF's and looked like a VG 4-fund portfolio
for the most part but did add some mid and small cap ETF's to it.
The fee a reasonable .30%, no trading fees, and includes rebalancing.
No mention of TLH and a very standard looking account otherwise.

Just FYI.
age in bonds, buy-and-hold, 10 year business cycle
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Re: What we know about robo advisors

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In all seriousness, Robo-advisors hold a lot of promise. People have need of advice and in some cases portfolio management and the robots can help to really bring the expenses down. I also like that robots can crunch a lot of data in a short period of time and can produce good recommendations. I suppose what will evolve is a hybrid between humans and robots. I look at it as the robots doing the first pass and perhaps a human providing some individualized tweaks. The human could also take a look and make certain that the output from the robot makes sense. I see the robots as a big time saver for human advisors. We will see how it works in actual practice.

The thing is, good human advisors are in short supply. The robots could help optimize the use of a rather limited resource.
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Re: What we know about robo advisors

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nedsaid wrote:In all seriousness, Robo-advisors hold a lot of promise. People have need of advice and in some cases portfolio management and the robots can help to really bring the expenses down. I also like that robots can crunch a lot of data in a short period of time and can produce good recommendations. I suppose what will evolve is a hybrid between humans and robots. I look at it as the robots doing the first pass and perhaps a human providing some individualized tweaks. The human could also take a look and make certain that the output from the robot makes sense. I see the robots as a big time saver for human advisors. We will see how it works in actual practice.

The thing is, good human advisors are in short supply. The robots could help optimize the use of a rather limited resource.
You are predicting the opposite of me. We'll know within 5 years. My belief is most of the current robo portfolios are pretty much what human advisors would do. They are just doing the same thing cheaper. They aren't really taking advantage of the fact that a computer is running things so there is no need to keep it simple. I think we go in the opposite direction with robo portfolios becoming too complex for any human to manage or likely understand. Fractional shares and 1000 or more positions each. Huge correlation matrixes dynamically reallocating daily or more often. A half dozen trader per day per client. In other words I think Hedgeable, Motif and Covester are where the market is going.
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Re: What we know about robo advisors

Post by nedsaid »

jbolden1517 wrote:
nedsaid wrote:In all seriousness, Robo-advisors hold a lot of promise. People have need of advice and in some cases portfolio management and the robots can help to really bring the expenses down. I also like that robots can crunch a lot of data in a short period of time and can produce good recommendations. I suppose what will evolve is a hybrid between humans and robots. I look at it as the robots doing the first pass and perhaps a human providing some individualized tweaks. The human could also take a look and make certain that the output from the robot makes sense. I see the robots as a big time saver for human advisors. We will see how it works in actual practice.

The thing is, good human advisors are in short supply. The robots could help optimize the use of a rather limited resource.
You are predicting the opposite of me. We'll know within 5 years. My belief is most of the current robo portfolios are pretty much what human advisors would do. They are just doing the same thing cheaper. They aren't really taking advantage of the fact that a computer is running things so there is no need to keep it simple. I think we go in the opposite direction with robo portfolios becoming too complex for any human to manage or likely understand. Fractional shares and 1000 or more positions each. Huge correlation matrixes dynamically reallocating daily or more often. A half dozen trader per day per client. In other words I think Hedgeable, Motif and Covester are where the market is going.
What people want is high tech/high touch. It is interesting that robots are getting better and better at being human like. Perhaps this will fill the need for high touch. If portfolios get too complex to understand, in my view they might be too complex to invest in. Components of a portfolio like AQR type of alternative funds are getting difficult for many investors to understand, such investments might be used for let's say 20% of a portfolio, and are pretty much a bond substitute. But the management of a portfolio itself should not be so complex that a human could not perform it.
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Re: What we know about robo advisors

Post by jbolden1517 »

nedsaid wrote:If portfolios get too complex to understand, in my view they might be too complex to invest in.
That's going to be the question. Most people don't understand their portfolios now. What happens when no they can't understand them? I'm not sure much changes. People can't understand how calls are connected (routes are too complex) yet they use phones. People no longer understand shipping routes yet the trucks still drive.... Why not add portfolio construction as just one more thing that requires math beyond what a human can do?

Of course maybe people won't invest in what they don't understand. But I doubt it.
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Re: What we know about robo advisors

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Speaking of complexity, the "Robo-adviser reviews" section has been revised: Robo-adviser *

At this point, I think the best tactic is to simply provide a list of review sites and do the best you can to educate the reader.

* The wiki is a collaborative effort. Another wiki editor has also worked on this section. See: View history to see who worked on the page and what changed.
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Re: What we know about robo advisors

Post by jbolden1517 »

Schwab Intelligent Portfolios

Schwab's doesn't charge for their robo-advisor service. Fees for funds average about 17 basis points. They also unlike most robo-advisors have a pronounced value tilt. They give this sample portfolio of a 2/3rds stock 1/3rd bond
Image

Fundamental are Schwab value ETFs using 3 value factors (Sales weighting, cash flow weighting and dividend weighting) (more details: https://intelligent.schwab.com/public/i ... -etfs.html). The ones without Fundamental are standard indexes (market capitalization weighting). The stock allocation has a solid value and small tilt. Most of the bond allocation (15%) is higher risk, high return brings down correlation a bit. It should be noted this is a substantial deviation from the 3-fund style portfolios where bonds are used for safety. These bonds include both duration risk and credit and are meaningfully generating return. In addition to the duration and credit risk on the bonds component this fund uses the equity as a core and introduces 2 main diversifiers. The diversifiers help withnon-correlation (non-correlation is important for increasing serial returns) while retaining a low fees (i.e. substantial non-correlation can be expensive to implement). Previous metals traditionally do well in crisis and inflation. The 6% in low risk bonds similarly is a diversifier that will do well especially against deflationary bears. They along with the cash are designed to give the investor something to rebalance out of.

Schwab offers a detailed list of the funds they use to construct the portfolio and how they are expected to perform: https://intelligent.schwab.com/public/i ... asses.html

The funds are offered in pairs because Schwab offer tax loss harvesting for portfolios over $50k using fund substitution.

They publish quarterly updates on how the components do (example 2Q2017): https://intelligent.schwab.com/public/i ... eview.html

Schwab is recognized as one of the best discount brokers for customer service. Schwab as a brokerage has strong banking features and sells a range of annuities... and these can be coordinated with the robo-advisor service (though it won't rebalance around them). The annuity feature is particularly important for income oriented retirees. The robo-advising can be used for revocable living trusts accounts which is a differentiating feature few other robos offer. The Schwab goal-tracker estimates how close the savings component is given ranges of portfolio returns to achieving an investment goal for a future timeframe (https://intelligent.schwab.com/public/i ... /goal.html)

For human guidence Schwab offers an upgrade to a human advisor for .28% with a cap at $900/ quarter (comparatively cheap). They also offer what they claim is full wealth management at .7-.9% with at $500k and .3% at $10m. This is a low min, lowest fee I've seen for wealth management, though the range of services also seems more middle class tailored (the sorts that a financial advisor would perform) than I've seen for wealth management. My gut is that this is gimmicky title aimed at people who don't actually need wealth management.

At this point Schwab Intelligent Portfolios is my recommended robo-advisor, and recommended simple portfolio.
Last edited by jbolden1517 on Sun Jul 30, 2017 10:59 pm, edited 1 time in total.
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Re: What we know about robo advisors

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jbolden1517 wrote:At this point Schwab Intelligent Portfolios is my recommended robo-advisor, and recommended simple portfolio.
I think you've just redefined "simple". How does the performance compare to simple portfolios using 3 or 4 funds? I'm referring to the portfolios in the wiki also known as Lazy portfolios.

I note your link to Schwab's Guide to Asset Classes & ETFs.

This is an attempt to compare a "DIY" lazy portfolio vs. a robo-adviser "simple" portfolio. Does it make sense to compare portfolios in this way?

Disclaimer: I'm using a 3-fund portfolio and have no intentions to change my methodology.
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Re: What we know about robo advisors

Post by jbolden1517 »

LadyGeek wrote:
jbolden1517 wrote:At this point Schwab Intelligent Portfolios is my recommended robo-advisor, and recommended simple portfolio.
I think you've just redefined "simple". How does the performance compare to simple portfolios using 3 or 4 funds?
I'd say the portfolios are so ideologically dissimilar they are going to be hard to compare directly. 3 fund rejects Modern Portfolio Theory, SIP is fully embracing it. 3 fund rejects factor investing, SIP is designing the whole portfolio around it. 3 fund sees bonds as "safe" while stocks are for growth, SIP is treating most of their bonds as just an alternative asset class and trying to jack up returns on them. Safety comes from low correlation.

But if I were to do a comparison... SIP is going to be a lot higher over most 10 year periods I'd assume an average of over 200 basis points total.

I'll start with the bonds. Most importantly for return you are taking on credit risk which is currently running only about 150 basis points, averages about 300 and maxes out for long periods as high as 500 basis points. You are going to pick up actual defaults and the diversification benefit of bonds will go down because credit risk will hurt during stock bears. 3 funders are going to have an easier time rebalancing but day in day out SIPers will make a lot more on their bonds. The second big difference is with SIP you are taking on more duration risk which is probably with about 50 basis points on the bonds. The extra duration also increases diversification benefit a lot, especially with interest rates below 5% and that's a pure plus. The gold and cash provide a bit of a drag on return that the 3 funders aren't getting (they are essentially in better cash, SIP is in worse cash) but their diversification is also much better. I'm going to comfortably say the bond portfolio outperforms by 150 basis points easily so for 1/3rd of the portfolio about 50 basis points.

On stocks you get the value effect which is worth 300 basis points on 2/3rds of the stock portfolio. So that's 2/3*2/3*300 = 166 basis points. You likely pick up another 50 or so because of the small tilt. Adding back the 50 from the bonds you are over 216 basis points better with SIP than 3 fund.

Now to pick something where I'm in the minority, my current big worry for indexing and passive on float manipulation vulnerability. These funds are going to be just as vulnerable but less exposed to dilution based manipulation (which is the more common type). So that could be another 100 basis points. On concentration based manipulation they are going to get hit even worse than 3-fund portfolios because they are likely to be more heavily overweight. But the number of companies doing concentration manipulations is much smaller, as are their cap weightings (or sales, cash flow, dividends). So I'd say that's -20 basis points for SIP. So I can see another 80 there if that plays out. But again that depends on your attitude towards float manipulation as a threat. I agree fully with Savita Subramanian (Bank of America, Merrill Lynch sector analyst) but AFAIK I'm the only Boglehead poster who does agree with her on this. So you can count that 80 if you want and be close to 300 basis points.
LadyGeek wrote:This is an attempt to compare a "DIY" lazy portfolio vs. a robo-adviser "simple" portfolio. Does it make sense to compare portfolios in this way?
Yes the Schwab isn't too different from what an advisor would do. It is pretty typical MPT. MPT isn't popular here (which seems to be a recent change, Larry Swedroe is certainly an MPT advocate). The kind of portfolio a full service brokerage might use (excluding the issues of fees and cost). I think it is fair to compare, though hard to compare because of the idealogical differences.
LadyGeek wrote:Disclaimer: I'm using a 3-fund portfolio and have no intentions to change my methodology.
That's fine. I'm not using SIP for myself either.
Last edited by jbolden1517 on Mon Jul 31, 2017 8:21 am, edited 1 time in total.
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Re: What we know about robo advisors

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The Schwab Model Portfolio reminds me an awful lot of the Paul Merriman Ultimate Buy and Hold Portfolio. The stock portions are very much the same. I like what Schwab is doing here. Where it differs is that Merriman likes to use US Treasuries and TIPS for the bond portion, his rationale is that bonds are for safety. The Schwab Model Portfolio takes an awful lot of risk on the bond side. My guess is that this supposedly 70% stock/30% stock Schwab Model portfolio will actually act more like an 80% stock/20% bond portfolio as Schwab is taking equity-like risks with High Yield and Emerging Markets bonds. High Yield and Emerging Markets Bonds are actually stocks in drag. The 5% in precious metals is an interesting addition. My own philosophy on bonds is Investment Grade/Intermediate Term and like to use Treasuries, TIPS, Mortgage Backed Securities, and Corporates. That is about as far as I want to go on the bond side though I will take a bit more risk than Swedroe or Merriman. So I like what Schwab does on the stock side, not so much on the bond side, and I wonder about the addition of precious metals.
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Re: What we know about robo advisors

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nedsaid wrote:The Schwab Model Portfolio reminds me an awful lot of the Paul Merriman Ultimate Buy and Hold Portfolio. The stock portions are very much the same. I like what Schwab is doing here. Where it differs is that Merriman likes to use US Treasuries and TIPS for the bond portion, his rationale is that bonds are for safety.
I should mention it also depends how much duration you pick up. High maturity treasuries are pure duration risk. [OT comment removed by moderator prudent] That's a nice diversifier in low interest rate environments. For a satellite they work well. If you don't go far out on the yield cure then of course they are super safe but I think taking on a mixture like 3-fund does makes more sense.
nedsaid wrote: The Schwab Model Portfolio takes an awful lot of risk on the bond side. My guess is that this supposedly 70% stock/30% stock Schwab Model portfolio will actually act more like an 80% stock/20% bond portfolio as Schwab is taking equity-like risks with High Yield and Emerging Markets bonds. High Yield and Emerging Markets Bonds are actually stocks in drag.
Agree this is a very different bond portfolio than 3-fund. Though the risks can be somewhat non-correlating.
nedsaid wrote: The 5% in precious metals is an interesting addition.
I agree. Until 2008 I used to always be heavily overweight gold stocks for non correlation. I certainly understand the argument for PM as a satellite and used to be an advocate for gold myself. I think it will work very well in high interest rate environments and times when collectables are skyrocketing. I think it will work well in environments when commodity prices generally are rising without having the contango problems. I haven't looked much into what Schwab is doing but I get the idea.
nedsaid wrote: My own philosophy on bonds is Investment Grade/Intermediate Term and like to use Treasuries, TIPS, Mortgage Backed Securities, and Corporates. That is about as far as I want to go on the bond side though I will take a bit more risk than Swedroe or Merriman. So I like what Schwab does on the stock side, not so much on the bond side, and I wonder about the addition of precious metals.
It is weird because 15 years ago I had this argument with Swedroe about long treasuries (I wouldn't hold them now but then I liked them) and their advantages for diversification. He bought into my numbers on how much better they were. I'm curious why he has has gone back. I know DFA has the same opinion of not taking much risk. Essentially there is the "better cash" type bonds and the risk type bonds and they really are two different types of investments. As for my own portfolio I'm currently in 2 leveraged high yield funds. Diversification is how I get safety.
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Re: What we know about robo advisors

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Last I read, Swedroe liked short term treasuries, particularly for the "Larry" portfolio.
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Re: What we know about robo advisors

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nedsaid wrote:Last I read, Swedroe liked short term treasuries, particularly for the "Larry" portfolio.
What is the Larry portfolio? The only thing I'm seeing is 70% short bonds, 15% SV, 15% EM. Is that what you mean?
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Re: What we know about robo advisors

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jbolden1517 wrote:
nedsaid wrote:Last I read, Swedroe liked short term treasuries, particularly for the "Larry" portfolio.
What is the Larry portfolio? The only thing I'm seeing is 70% short bonds, 15% SV, 15% EM. Is that what you mean?
BINGO! You've got it. I understood that the 30% Small Value was divided among US Small Value, Developed Markets Small Value, and Emerging Markets Small Value. This represents thousands of stocks. When Swedroe says short bonds, he means Treasuries.
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Re: What we know about robo advisors

Post by jbolden1517 »

nedsaid wrote:
jbolden1517 wrote:
nedsaid wrote:Last I read, Swedroe liked short term treasuries, particularly for the "Larry" portfolio.
What is the Larry portfolio? The only thing I'm seeing is 70% short bonds, 15% SV, 15% EM. Is that what you mean?
BINGO! You've got it. I understood that the 30% Small Value was divided among US Small Value, Developed Markets Small Value, and Emerging Markets Small Value. This represents thousands of stocks. When Swedroe says short bonds, he means Treasuries.
Don't know the context on that one at all. I'm assuming that's a rapid depletion fund like paying for kids in college or the last decade or the last few years of retirement? And or, it is meant as an alternative to cash for emergency money (much better return)?
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Re: What we know about robo advisors

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jbolden1517 wrote:
nedsaid wrote:
jbolden1517 wrote:
nedsaid wrote:Last I read, Swedroe liked short term treasuries, particularly for the "Larry" portfolio.
What is the Larry portfolio? The only thing I'm seeing is 70% short bonds, 15% SV, 15% EM. Is that what you mean?
BINGO! You've got it. I understood that the 30% Small Value was divided among US Small Value, Developed Markets Small Value, and Emerging Markets Small Value. This represents thousands of stocks. When Swedroe says short bonds, he means Treasuries.
Don't know the context on that one at all. I'm assuming that's a rapid depletion fund like paying for kids in college or the last decade or the last few years of retirement? And or, it is meant as an alternative to cash for emergency money (much better return)?
The Larry portfolio is a long term investment portfolio. You balance a high volatility/high return asset class with a low volatility/lower return asset class. When things go bad with stocks, the best diversifier are safe bonds, or treasuries. What could be safer than shorter term treasuries?

There are good articles out there on the Larry portfolio. Just google it. Threads here on the forum have discussed it. I personally do not advocate such extreme tilting, even for just 30% of the portfolio. The key word for me is "tilt". If I am tilted towards Value, it doesn't mean that I don't have Growth. If I am tilted towards Small, it doesn't mean that I don't own Large. Tilt means that I hold certain asset classes at greater than market weights. So I am overweighted Value and underweighted Growth, overweighted Small-Cap and underweighted Large-Cap.
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Re: What we know about robo advisors

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nedsaid wrote: The Larry portfolio is a long term investment portfolio. You balance a high volatility/high return asset class with a low volatility/lower return asset class. When things go bad with stocks, the best diversifier are safe bonds, or treasuries. What could be safer than shorter term treasuries?

There are good articles out there on the Larry portfolio. Just google it. Threads here on the forum have discussed it. I personally do not advocate such extreme tilting, even for just 30% of the portfolio. The key word for me is "tilt". If I am tilted towards Value, it doesn't mean that I don't have Growth. If I am tilted towards Small, it doesn't mean that I don't own Large. Tilt means that I hold certain asset classes at greater than market weights. So I am overweighted Value and underweighted Growth, overweighted Small-Cap and underweighted Large-Cap.
OK I get it. I'd disagree with your comments re. tilt on this one. This is classic core satellite. You get the enhanced return of intermediate bonds over cash. You boost that return by having stuff that's going to correlate strongly and negatively with interest rates (especially increases). The purpose of the EM and SV is partially to boost returns, but mainly for their volatility. Value stocks are generally short bonds (i.e. they have a lot of debt) and small value is more volatile. EMs I'm assuming ends up being foreign banks that owe lots of money in dollars and of course they are volatile. You really don't care about matching the market for stocks at all in this portfolio you are just looking to create synthetically (without leverage) really high yielding safe intermediate bonds and let them compound. Any sort of deleveraged stock would violate the core satellite approach, they wouldn't be volatile or negatively correlating enough..

I need to think about this portfolio a lot more to have an opinion. I had noted the low volatility but hadn't noted until your comment that you might get returns up to classic 70/30, 60/40 type levels while being 30/70.

Be curious how it holds up against prolonged inflation. Seems to me the intermediates lag inflation, the SV over-perform and the EMs do whatever. Then it gets worse because that's going to be followed by a harsh Fed tightening cycle. The intermediates get hurt on duration. Small value gets badly hurt in the recession. EMs get hurt because the dollar likely strengthens. Recession mIght not matter too much because the core of the portfolio is high quality bonds and quality is good. But at least when I first think about it, that seems to be my worry. You could have a 10 year or longer period where that portfolio just gets mauled, especially in real terms (Lady Geek, nothing like the way 3 fund could get mauled btw, that is a very dangerous portfolio). Its interesting but this might be a very good portfolio to hold on 2-3::1 leverage if you can borrow cheaply enough. The intermediate to cash spread is usually going to be safe and the above scenario hits the debt against you as much as it hits the portfolio. The tightening cycle is my worry. If short term rates are say 10% and the bonds are paying 6% while SV and EM is down... could be a tough portfolio to hold. But that's not going to be more than a year or two. This also might work if you replace the high quality with high quality municipals. The income is tax free but the interest is tax deductible. With this little of a spread you might hold the no AMT bonds directly and not pay fees.

So thanks for the very interesting idea. That's one I might use for myself though I need to think it through quite a bit more.
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Re: What we know about robo advisors

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First, I added your Schwab Intelligent Portfolio review to the wiki. It's quite comprehensive and there's no reason we can't post our own reviews.

See: Robo-adviser (Member reviews)

As a reviewer, it's important to state whether you use this robo-adviser personally or not. I captured your follow-up comment to clarify your status (do not use Schwab).

If anyone has a comprehensive review they'd like added to the wiki, please post here.
jbolden1517 wrote:
LadyGeek wrote:
jbolden1517 wrote:At this point Schwab Intelligent Portfolios is my recommended robo-advisor, and recommended simple portfolio.
I think you've just redefined "simple". How does the performance compare to simple portfolios using 3 or 4 funds?
I'd say the portfolios are so ideologically dissimilar they are going to be hard to compare directly. 3 fund rejects Modern Portfolio Theory, SIP is fully embracing it. 3 fund rejects factor investing, SIP is designing the whole portfolio around it. 3 fund sees bonds as "safe" while stocks are for growth, SIP is treating most of their bonds as just an alternative asset class and trying to jack up returns on them. Safety comes from low correlation.

But if I were to do a comparison... SIP is going to be a lot higher over most 10 year periods I'd assume an average of over 200 basis points total.
I'd like to challenge your statement that "three-fund portfolios reject Modern Portfolio Theory". See: A Diversified Three Fund Portfolio Is Possible, from financialsamurai.com.

I'd also like to take a counterpoint to your most interesting comparison of SIP vs. 3-fund. For me, I'm not convinced until I see some data. In this case, it should be possible to backtest* the SIP portfolio against several "conventional" lazy portfolios.

We've got a spreadsheet for that: Simba's backtesting spreadsheet

I asked the guys in the support thread to see what they think: Re: Simba's backtesting spreadsheet [a Bogleheads community project]

* Backtesting - Using historical data to predict future performance. (Caveat: Tread carefully, past performance does not predict future performance.)
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Re: What we know about robo advisors

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LadyGeek wrote:First, I added your Schwab Intelligent Portfolio review to the wiki. It's quite comprehensive and there's no reason we can't post our own reviews.

See: Robo-adviser (Member reviews)
That's cool. I was thinking of doing Bettermint next. BTW I think you are pointing to the wrong post, should be: viewtopic.php?p=3472937#p3472306
LadyGeek wrote: As a reviewer, it's important to state whether you use this robo-adviser personally or not. I captured your follow-up comment to clarify your status (do not use Schwab).
Agreed. I'm becoming less of a mutual fund / etf investor and more of an arbitrage investor, sort of running my own personal hedgefund so not really a fit for an of these portfolios. (As an aside to lurkers: The fact that I'm doing this does not mean I would recommend the plays I'm making to anyone who doesn't understand them thoroughly. You can lose a lot of money really fast getting arbitrage plays wrong. Agree completely with the Boglehead "picking up nickles in front of a steamroller" description for these sorts of investments). Though if you want disclosure, Schwab Fundamentals are the single biggest source of ETFs in my personal holdings.
LadyGeek wrote:
jbolden1517 wrote: I think you've just redefined "simple". How does the performance compare to simple portfolios using 3 or 4 funds?
I'd say the portfolios are so ideologically dissimilar they are going to be hard to compare directly. 3 fund rejects Modern Portfolio Theory, SIP is fully embracing it. 3 fund rejects factor investing, SIP is designing the whole portfolio around it. 3 fund sees bonds as "safe" while stocks are for growth, SIP is treating most of their bonds as just an alternative asset class and trying to jack up returns on them. Safety comes from low correlation.

But if I were to do a comparison...
I'd like to challenge your statement that "three-fund portfolios reject Modern Portfolio Theory". See: A Diversified Three Fund Portfolio Is Possible, from financialsamurai.com.[/quote]

I'm not sure how this disproves my assertion. The article basically asserts that 3-fund is more diversified than a single stock. No question. That's a very different statement than chasing total portfolio return by carefully weighing assets and correlations.
LadyGeek wrote: I'd also like to take a counterpoint to your most interesting comparison of SIP vs. 3-fund. For me, I'm not convinced until I see some data. In this case, it should be possible to backtest* the SIP portfolio against several "conventional" lazy portfolios. We've got a spreadsheet for that: Simba's backtesting spreadsheet
I think SIP will beat 3-fund on a backtest. And they are closer so it is a fair comparison since they are both CRAAL strategies. So assuming SIMBA has any sort of sales / cashflow weighted index to use for backtesting sounds good.

Two points though.

If you backtest, Hedgeable will crush almost all the other robo-advisors including 3 fund and SIP. For example Hedgeable gets out of the 2008 bear with a -16.05% drawdown, with the portfolio only going -6.05% because it was partially selling during. TSM is going to drop -55% with with a cumulative return of -49% for the year. If you rebalanced into the bear you lose even more. Or for example 2011 where 3-fund 60/40 goes -7.3% Hedgeable diversified (lots of bonds) is +1.3%. The question for Hedgeable is given that the technique of variable covariances weren't possible at reasonable cost to compute until 15 years ago what happens in a market where hedgefunds are now computing them regularly. Hedgeable is a robo advisor that I might consider for part of the portfolio for myself, but I'm not ready to recommend because the techniques they are using are too new. If they lag because the are competing with hedgefunds using the same strategies, they could lag by many percentage points.

Second. One this doesn't matter too much on 3-fund vs. SIP but remember how important indexing is to the market now. You are backtesting against data where indexing didn't play much of a role. Today's market it does. Sell side investors and market makers are employing counter indexing strategies today (that will hit SIP but to a lesser extent). They weren't 30 years ago because why would they? So treat the results with some caution. All things aren't equal.
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Re: What we know about robo advisors

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jbolden1517 wrote:
LadyGeek wrote:First, I added your Schwab Intelligent Portfolio review to the wiki. It's quite comprehensive and there's no reason we can't post our own reviews.

See: Robo-adviser (Member reviews)
That's cool. I was thinking of doing Bettermint next. BTW I think you are pointing to the wrong post, should be: viewtopic.php?p=3472937#p3472306
Thanks, it's fixed: Robo-adviser (Member reviews).

BTW, where you aware of our blog? The link is on the left-side menu of every wiki page. See: Financial Page | A Bogleheads® blog. We're always looking for new blog posts - robo-advisers, reviews. etc. would be appreciated. If you're interested, PM Barry Barnitz to get started. The blog is WordPress.

Otherwise, post your reviews here and I'll link to them in the wiki. If anything shows up in the blog, I'll link to that instead. (FYI - I'm also a blog admin.)
jbolden1517 wrote:I think SIP will beat 3-fund on a backtest. And they are closer so it is a fair comparison since they are both CRAAL strategies. So assuming SIMBA has any sort of sales / cashflow weighted index to use for backtesting sounds good.

Two points though.

If you backtest, Hedgeable will crush almost all the other robo-advisors including 3 fund and SIP. For example Hedgeable gets out of the 2008 bear with a -16.05% drawdown, with the portfolio only going -6.05% because it was partially selling during. TSM is going to drop -55% with with a cumulative return of -49% for the year. If you rebalanced into the bear you lose even more. Or for example 2011 where 3-fund 60/40 goes -7.3% Hedgeable diversified (lots of bonds) is +1.3%. The question for Hedgeable is given that the technique of variable covariances weren't possible at reasonable cost to compute until 15 years ago what happens in a market where hedgefunds are now computing them regularly. Hedgeable is a robo advisor that I might consider for part of the portfolio for myself, but I'm not ready to recommend because the techniques they are using are too new. If they lag because the are competing with hedgefunds using the same strategies, they could lag by many percentage points.

Second. One this doesn't matter too much on 3-fund vs. SIP but remember how important indexing is to the market now. You are backtesting against data where indexing didn't play much of a role. Today's market it does. Sell side investors and market makers are employing counter indexing strategies today (that will hit SIP but to a lesser extent). They weren't 30 years ago because why would they? So treat the results with some caution. All things aren't equal.
I'll give the backtesting spreadsheet guys some time to respond. It sounds like we're heading for a robo-adviser smackdown (my robo-adviser can crush your robo-adviser...). :)

I had to look up CRAAL - Constant Ratio Asset Allocation.

Can you go a bit more into the sell-side counter indexing strategies? I'm not familiar with this, or perhaps I've read about them using different terminolgy. An example would be helpful.

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Re: What we know about robo advisors

Post by jbolden1517 »

LadyGeek wrote:
jbolden1517 wrote: Second. One this doesn't matter too much on 3-fund vs. SIP but remember how important indexing is to the market now. You are backtesting against data where indexing didn't play much of a role. Today's market it does. Sell side investors and market makers are employing counter indexing strategies today (that will hit SIP but to a lesser extent). They weren't 30 years ago because why would they? So treat the results with some caution. All things aren't equal.
Can you go a bit more into the sell-side counter indexing strategies? I'm not familiar with this, or perhaps I've read about them using different terminolgy. An example would be helpful.
The stuff I was discussing in the TSM post for example.

Index funds aim to hold a constant percentage of a stock. Which means the dominant trading strategy excluding increasing the percentage ownership for index funds is to buy dilution (buy stock when control investors or the company sell shares) and sell concentration (sell into buybacks). Between indexing and quasi indexing (funds that in the aggregate act like index funds because they want to track closely to the market) we are at about 70% of the SP500.

If 70% of a stock's float is going to be bought regardless of price it becomes incredibly profitable for a company to create float and sell shares to index funds (I'm including quasi-indexing and passive here) as a way to use index funds as a cheap source of financing. In a normal market investors are rationally pricing stocks based on their future discounted dividends using a discount rate that adjusts for risk. Under normal valuation doubling the number of shares merely cuts the share price in half. Doubling the number of shares should have no impact on market cap. But of course index funds don't rationally evaluate the future stream of dividends. Indexers hold a constant portion of any stock, buying or selling based on float not dividend prospects. So when the number of shares double they have to slowly raise they buy target till they get the shares back in balance. This is the same thing that happens to short investors in a short squeeze. They will end up paying far more than the company is worth. Just imagine a stock with a P/B of 5 doubling its number of shares. The indexers go from holding 70% to 35% and thus have to buy 1/3 of the company or 2/3rds of the new float. If the P/B stays constant (doubtful the control investors would be quite that greedy but it explains the principle) that means the indexers end up with the same 70% of the assets and also a large cash position they paid $5 for every $1 of.

Now that cheap financing benefits the company and the passive investors own 70% of the company. So 70% of the lost $4 is going from their right pocket to the left pocket the same as if the index fund had directly written a loan to the company and then written the loan off. But the remaining $1.20 just fell on the floor. Its going to go to control investors, other investors, short sellers... That drain is huge. All this can be completely above board and disclosed because indexes don't read prospectus or PR statements. Companies can tell investors openly they are manipulating their float to squeeze index funds and the index funds still buy. Something similar to this happened for a decade (and arguably is still happening) to VPACX. Essentially you are in the business of funding negative interest bonds to SP500 high P/E stocks.

On the low side the opposite things happen to beaten down stocks that are buying back. Control investors can diminish float which forces index funds to sell to them, which allows them to diminish float cheaply, which forces more selling.... So after having the indexers sit for years while a company restructures its debt and is about to take off, control investors can essentially buy back at 2/3rds of the company cheaply from indexers and quasi-indexers. And not only that they can both games serially. Forcing the index funds to buy high, drive the stock down, sell low, let the stock rise, buy high... in an unending cycle.

As far as arbitrage investors here is an example. Index funds use a patient buyer patient seller strategy to buy into their positions. Because these are not going to move with news they are safe for the day or two. A patient buy sitting out there is to a short term trader a free fixed price put near the current stock price. Getting a put for free the arbitrage investor can short the call at the same price as the index fund's large buy order and long the underlying stock. The arbitrage investor collects the theta, which is essentially a very high interest rate bond. This is for him risk free money. The stock goes up (say a piece of positive news), the call they sold gets exercised and their stock gets sold to the buyer. They just pocketing all the theta. The stock goes down the call decreases in price, they buy the call back at a lower price (the call and the stock will move together) and dump the stock on the index fund. They make a profit from their short call position. Now you may be wondering where this free money is coming from. From the index fund's perspective in a situation where they otherwise would have gotten the stock the arbitrage investor's higher purchase price blocked them. Often that means in a day or two the the index fund is likely going to have to raise their target price and when they finally do fill they fill at a higher cost. Of course if they don't immediately fill, the cycle can repeat at the new higher price. The math works the same if the stock is approaching the index fund sell price, except this time it is a free call and they sell the put and short the stock.

Those are two examples I could do more.
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siamond
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Re: What we know about robo advisors

Post by siamond »

LadyGeek wrote:I'd also like to take a counterpoint to your most interesting comparison of SIP vs. 3-fund. For me, I'm not convinced until I see some data. In this case, it should be possible to backtest* the SIP portfolio against several "conventional" lazy portfolios.

We've got a spreadsheet for that: Simba's backtesting spreadsheet

I asked the guys in the support thread to see what they think: Re: Simba's backtesting spreadsheet [a Bogleheads community project]

* Backtesting - Using historical data to predict future performance. (Caveat: Tread carefully, past performance does not predict future performance.)
Hi there. I am doing most of the maintenance on the Simba spreadsheet nowadays. I can certainly run and document a backtest trying to approximate the SIP portfolio and compare it to what a typical (human being!) Bogleheads would do. I would suggest to select the closest 3-funds portfolio we can find (the 'classic' Bogleheads choice), but also to add a fairly typical tilted portfolio (as many Bogleheads do exactly that, starting by myself). Then compare.

This wouldn't be a perfect simulation, but at the first glance, I think we can get pretty close. I can also share some thoughts about rebalancing techniques. Now things like TLH, we can't model, as this *highly* dependent on one's personal circumstances. I'll work more on this later today, and open a dedicated thread on the matter. Overall, this robo-adviser discussion is very interesting, thank you for your illuminating inputs, jbolden1517.
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Re: What we know about robo advisors

Post by jbolden1517 »

Betterment

Betterment is today the most popular robo-advisor out their among mainstream choices, they were also one of the first 2. They use a value tilt domestically and a pure indexing approach internationally. They also have a heavy Vanguard focus.

Image
  • US Total Stock Market – Vanguard U.S. Total Stock Market Index ETF (VTI)
  • US Large-Cap Value Stocks – Vanguard US Large-Cap Value Index ETF (VTV)
  • US Mid-Cap Value Stocks – Vanguard US Mid-Cap Value Index ETF (VOE)
  • US Small-Cap Value Stocks – Vanguard US Small-Cap Value Index ETF (VBR)
  • International Developed Stocks – Vanguard FTSE Developed Market Index ETF (VEA)
  • Emerging Market Stocks – Vanguard FTSE Emerging Index ETF (VWO)
  • Short-Term Treasuries – iShares Short-Term Treasury Bond Index ETF (SHV)
  • Inflation Protected Bonds – Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
  • US High Quality Bonds (IRA and 401(k) accounts) – Vanguard US Total Bond Market Index ETF (BND)
  • National Municipal Bonds (Taxable accounts) – iShares National AMT-Free Muni Bond Index ETF (MUB)
  • US Corporate Bonds – iShares Corporate Bond Index ETF (LQD)
  • International Developed Bonds – Vanguard Total International Bond Index ETF (BNDX)
  • Emerging Market Bonds – iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Core funds are funds most Boogleheads will be familiar with (similar to what Bogleheads who do a little slice and dice + value tilt would have). The bond allocation is more complex than most Bogleheads and seems to be dilutive. Probably somewhat better than 3-fund for rebalancing but not much better. Here is a web application giving the allocations as you dynamically move the stock up or down: https://www.betterment.com/resources/re ... tion-chart

They currently offer up to 1 year with no fees (at $500k, starts at 1mo free at $10k) The fee structure after is:
25 basis points -- robo advisor only
40 basis points -- One FA call + robo
50 basis points -- Unlimited FA + robo

They have fallen behind on tax loss harvest to wealthfront in particular, and have intention of catching up with robos like Hedgeable that create synthetic losses to harvest. You should expect approximately 10% of portfolio value in the first 2 years with much less after. Their estimate is a 75 basis point increase in returns through constantly monitoring this and doing fund substitutions.

They offer an automatic sweep feature from bank accounts which sounds rather nifty. Having had this with a bank based broker in the 1990s it certainly helped get more money out of frittering away and into my then mutual fund investments.

They offer a social responsible portfolio at low fees along with FAs responsive to SRI concerns. I didn't find many details: https://www.betterment.com/resources/in ... portfolio/
They do point out correctly that SRI investing right now often leads to diversification risks or higher costs and seem to be addressing this head on. Would love to have seen more details as to how.

Being one of the oldest and best known there are a ton of reviews available. Here is just a sample.
http://www.businessinsider.com/betterment-review
https://wallethacks.com/betterment-review-2017/
https://investorjunkie.com/8745/betterment-review/
http://www.investmentzen.com/robo-advisors/betterment
https://www.cashcowcouple.com/betterment-review/
https://www.nerdwallet.com/blog/investi ... nt-review/

The only negatives I've heard about Betterment are in close or moving accounts. The consensus is they do make this annoying, though nothing iffy.

In terms of personal review. There is nothing really objectionable at this portfolio but ultimately it doesn't seem to be taking anywhere near enough advantage of the medium. They offer a portfolio somewhat better than 3-fund because of the value tilt and tax-loss harvesting. A few years ago they did not have this value tilt so their new portfolios are a huge improvement. Vanguard is not a value house and Vanguard value funds end up being just value tilted, themselves so this is a mild tilt. This portfolio is much better than many of the robo-advisors that end up growth focused. I find them boring but you won't go too wrong with these investment choices. I think the average Boglehead would find Betterment a company they could unhesitatingly recommend for their friends who are bad at investing.

Stepping back a bit. Betterment was clearly were an early innovator in this space and they are improving but lagging. In terms of features they are now trailing almost all other najor robo-advisors, though they acknowledge the problem and are working to fix it. As a company they and Wealthfront own the vast majority of the direct to customer space. They naturally grow as robo-advising grows particularly among millennials. They are moving into the 401K space, and compared to most company 401Ks they will be terrific assuming they can handle the customer service demands of a 401K. But to grow beyond their referral growth has proven challenging the last 2 years. Most of the companies they are competing with for new clients at the same fee level are much smaller and have developed interesting niches to compete with Betterment (like Acorn, Covester, Hedgeable, Motif ). Alternatively they are attached to brokerages and thus have a much wider range of services (Fidelity Go, TD Ameritrade Essential portfolios, Merrill Edge Guided, Schwab Intelligent Portfolios...) as well as a banking relationship to make the robo-advisor service more profitable. Those that have much higher fees and thus can offer a lot more attention. Traditional advisory firms currently spend about $4k on client acquisition, Betterment is having trouble being profitable at any more than $300 for client acquisition. The more traditional firms's robo-advisors are aiming for "cyborg advising" (human advisor with a robo advisor handling rebalancing) and this combination right now is winning the race for clients.
(http://fsc.org.nz/site/fsc/files/FAAR%2 ... 0We....pdf )

In many ways they are analogous to the Vanguard of the 1980s. Vanguard's low cost fee basic fee won the war in mutual funds. Vanguard has surpassed Fidelity who surpassed the loaded mutual funds of its day. So it is entirely possible the growth problems Betterment are having are temporary. Fees matter to returns, cool gimmicks do not. But cool gimmicks or genuine high cost value adds are at least right now are attracting clients. Just as Vanguard had to struggle with for many years against the richer services many other companies could provide from the enormous amounts of money loads provided them, Betterment is having to struggle against the richer services of other firms.
Last edited by jbolden1517 on Wed Aug 02, 2017 8:00 am, edited 2 times in total.
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Re: What we know about robo advisors

Post by nedsaid »

How about a review of Fidelity Go service? From what I see, it looks good. The expense ratios of the index funds are included in their fees making them very competitive with Vanguard Advisory Service, though VAS is live humans and not robots.
A fool and his money are good for business.
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Re: What we know about robo advisors

Post by siamond »

Well, I could easily add Betterment to the backtesting simulation, this is actually simpler than SIP. You're right, I could see Bogleheads folks going for a portfolio like that, except for the relative complexity of the bonds side of the equation.

This would be comparing a bit apples to oranges though, given Betterment's 90/10 AA vs. SIP 70/30 (if we assimilate cash to bonds, and commodities to stocks - at the macro level) AA. Is there a Betterment variation that would be closer to 70/30?
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Re: What we know about robo advisors

Post by siamond »

I have a broader question though. I find myself quite unconvinced by the value-added of the 'robot' doing the TLH and/or the rebalancing on my behalf. And I don't see that the two portfolios documented so far are that special, aside from what I would call 'fairly meaningless hair splitting' in some categories. :wink:

Where I would see true value-added would be a truly useful process requiring more computational and modeling power. Optimizing correlations to death ala MPT might be one (and yes, a 3 fund portfolio isn't entirely optimal in this respect), but it seems a fool's errand to me, first because it's an always moving target (correlation patterns keep changing - just ask questions about gold miners to MPT supporters before/after 2008!), but more importantly because it equates risk with volatility, and personally, volatility is like the 5th or 6th item of my list of risks to put under control... I actually view long-term risks as much more important than short-term risks, and defined my AA accordingly. And trying to explain a lot of shades of grey about risks to a computer, good luck with that.

Where I would see true value-added would be tax optimization, and that goes way beyond TLH. Full tax planning requires analyzing decades ahead to what will happen (e.g. RMDs, SSA/Pension) and what could happen (asset location selection and changes, things like Roth conversion, states when you work/retire, etc). THAT is complicated. Personally, I did my own spreadsheet for this, but I know it will be a pain to maintain, and that I am not taking all factors in account, very far from it, and not everybody is as geeky as I am. It appears that there are few financial advisors capable of doing something like that, actually. Heck, because it's complicated!

jbolden1517, are you aware of any robo-adviser going in such direction, some form of tax-optimized long-term planning?
Last edited by siamond on Tue Aug 01, 2017 4:16 pm, edited 1 time in total.
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Re: What we know about robo advisors

Post by jbolden1517 »

nedsaid wrote:How about a review of Fidelity Go service? From what I see, it looks good. The expense ratios of the index funds are included in their fees making them very competitive with Vanguard Advisory Service, though VAS is live humans and not robots.
I ran a quick 70/30 portfolio for myself through Fidelity Go.

iShares Core S&P 500 (IVV) 40.18%
iShares Core S&P Mid-Cap ETF (IJH) 4.90%
iShares Core S&P Small-Cap ETF (IJR) 3.92%

Fidelity Global ex U.S. Index Fund - Premium Class (FSGDX) 21.00%

Bonds
Fidelity Municipal Income Fund (FHIGX) 22.50%
Fidelity Limited Term Municipal Income Fund (FSTFX) 2.50%
Fidelity Conservative Income Municipal Bond Fund - Institutional Class (FMNDX) 4.50%
Fidelity Government Cash Reserves (FDRXX) 0.50%

A large/small distribution even worse than TSM. Nothing to rebalance out of, no diversifiers at all. No value. Didn't ask my state to target the municipals (which are a huge percentage of the portfolio). This one is an easy not recommended.
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Re: What we know about robo advisors

Post by jbolden1517 »

siamond wrote:Well, I could easily add Betterment to the backtesting simulation, this is actually simpler than SIP. You're right, I could see Bogleheads folks going for a portfolio like that, except for the relative complexity of the bonds side of the equation.

This would be comparing a bit apples to oranges though, given Betterment's 90/10 AA vs. SIP 70/30 (if we assimilate cash to bonds, and commodities to stocks - at the macro level) AA. Is there a Betterment variation that would be closer to 70/30?
I could probably dig up a 70/30 for Betterment. You would just run it an force a 70/30 result by changing your risk tolerance. The only thing you are testing is the effect of the value premium over 3-fund which of course is going to be good. The rest of it is just a more complex version of 3-fund (the bonds are especially silly). FWIW on the comparison with SIP I agree with nedsaid the SIP 70/30 is taking substantially more risk on the bond side than 3-fund does. You might want to compare to both 70/30 and 80/20 3-fund.
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