I came across an article this week on the performance of 'robo-advisors'. Robo-advisors are the automated investment operations that have sprung up recently that offer to manage your money at a discounted rate because the portfolios are determined by a computer algorithm (program). They all claim to use inexpensive passive index funds and have developed their algorithm based on Modern Portfolio Theory. That being the case, one would imagine that they would all produce the same results. All you would have to do is pick the cheapest one and sit back, let the algorithm work its magic, and start looking at brochures for luxury retirement condos. A recent exercise by Condor Capital Management, however, revealed that not all algorithms are created equal in robo-land. Condor opened accounts at more than a dozen robo-advisors and fed the computers the same investor profile designed to produce a portfolio of 60% equities and 40% fixed income.
The results were surprising as the returns varied from 5.55% to 10.75% over the test period. If this was truly passive management the various algorithms would produce portfolios that mimicked the construction of widely followed global equity and fixed income indexes. That the results vary so widely indicates that these algorithms are, in fact, a form of active management. This leaves the investor in quite a bind. Robo-advisors are marketed as a one-stop solution to avoid the process of picking mutual funds or constructing a portfolio with them. Now, apparently, the investor must evaluate the performance and methodology of various computer programs in order to choose which robo-advisor is the best, or best for that investor. Good luck with that, as robo-advisors have little or no track record and are notoriously non-transparent about their methodology. A least with mutual funds you can base decisions on decades of performance and a clear understanding of just what you are in vesting in. Anyone who has spent any time around computers will tell you that programming is very much a “garbage in – garbage out” exercise. Computers (at this point in time, anyway) only do what humans tell them to. If you tell a computer to do something stupid, it will do it and keep doing it – until somebody pulls the plug. Maybe we should put aside those condo brochures and do some more good old-fashioned investment research.