In search of Robo-advisor Actual Performance. Anything out there?

Performance Monitor

Aphrodite, a mobile cross-continental femme, shared publicly on the Daily Fintech platform her account integration concerns and her confusion in choosing from the multiple financial service providers that are competing to satisfy her needs.

Unfortunately, the seasoned women in digital wealth management working on bridging the gender gap, Sallie Krawcheck and Gemma Godfrey, are focused for now in their respective regions (US, UK). Ellevest, co-founded by Sallie, who from junior analyst at Salomon Brothers raised to CEO of Merrill Lynch Wealth Management, operates only in the US. Moola, founded by Gemma, who started at Goldman Sachs and raised to multiple senior positions in fund management, is just launching in the UK.

Aphrodite’s needs are more complex. She made it clear to her husband:

  • Ping: Listen, online ex-brokers that have become investment advisors or offer all sorts of DIY tools, sound fine to me. I get your points but it seems to me that we have shifted the confusion and difficulty of evaluating such services, from offices and branches simply online. So, how is that better? I am actually more confused because there are increasingly more service providers online, out there. I know Fees has been their marketing campaign but hey, this isn’t a car ride to try it out and use it once in a while when convenient. So don’t you Uber me for our financial needs.
  • Pong: If you’re not comfortable being serviced from an ex-broker, just because of your preconceptions about their hidden agendas on pushing products etc; we can go down the route of these new robo-advisors. Not so new any more. The only issue with them is that they are not that global, so we would need to pick and choose at least two; one for the Americas and one for our European holdings.
  • Ping: For me that wouldn’t be the determining factor, I am okay with two choices. Actually, my priorities are:
    1. Performance
    2. Ease of accessibility when needed
    3. Transparency of costs & Costs
    4. Ease of use, mobile, contextual investment research

And the order is not coincidental. With this whipsaw in the markets, I am not focusing on saving 50bps on commissions when I can loose 1000bps (10%) in a couple of weeks. Watching my holdings be in the red while not being able to communicate, will force me to hit that sell button on my smartphone when I should not.

Broadcasting pause of Ping-Pong communication of the couple.

Aphrodite sent me looking for performance figures of robo-advisors. Is it predominantly we women who care first about performance? Maybe Sallie Krawcheck knows more about this since her platform already takes a more goal-based approach tailored to women’s way of thinking.

Earlier this year, I had proposed that Trust and performance would be the name of the game for robos this year instead of fees.

Show me WHY I should trust you and WHERE is the performance.

It is too early to evaluate this proposition. However, I am appalled by the crumbs of evidence that I am finding on robo-advisory performance. One can of course, argue that no investment portfolio is the same and therefore, benchmarking returns isn’t a clean business. But hey, this issue has been around forever whether the returns come from offline Mungers or super-algos. Performance network has made this easy and simple and is inviting individuals and institutions to join the “The performance transparency movement”. This is originating in Europe but has no inherent barriers.

It is so odd that standalone robo-advsiors aren’t reporting their performance based on the global GIPS standards, an investment management standard that isn’t a regulation or mandatory compliance rule.

The Global Investment Performance Standards (GIPS®) are a set of standardized, industry-wide ethical principles that provide investment management firms with guidance on how to calculate and report their investment results to prospective clients.

Yes we live in a world that crowd-sourced information, if processed appropriately, could offer value (e.g. Estimize). However, I am not looking to find crowd-sourced forecasts of future performance of robo-advisors. I am not interested either in back testing their performance, because I understand the shortcomings and advantages of such calculations and graphs (from the old days of working in the hedge fund investment management business). I simply want to be able to see, Actual Performance and be able to choose periods and benchmarks; before actually becoming a client. I want to make sure that reported results are not from “cherry picking” accounts, back testing, and inadequate opaque disclosures.

My findings of actual robo-perfomance are poor. I picked them (very few anyway) based on page authority, since none of them are what I am really looking for.

Hedgeable has been computing a Robo-index and has calculated a 2yr composite return using certain reconstructed portfolios from Betterment and Wealthfront. The Robo-index methodology is explained on their site. No intention to go into any details.

  • Dear Aphrodite, a 2yr annualized performance of -0.53% is reported from a back testing methodology.

Then there is Meb Faber (not to be confused our Swiss compatriot with Mr. Gloom Boom Doom, Marc Faber) founder of Cambria, who launched in Fall 2015 the first no-fee global allocation ETF that we’ve already discussed. Meb Faber reconstructed the 2015 performance of 5 portfolio allocations from Betterment and Wealthfront. The allocations of each of these portfolios are described in Faber’s 2014 WealthFront And Betterment Allocations. He reports the reconstructed and backtested performance results for each of these:
Faber robo performance

Source: Performance Review of Betterment and Wealthfront

  • Dear Aphrodite, the 2015 performance of 5 representative portfolios from the two largest standalone robo-advisors in the US, range from -1% to -4.60% for the more aggressive ones. Unfortunately, again using a back testing methodology offered to subscribers of Idea Farm, a subscription based investment research platform.

Now over to Europe. Nutmeg is only one that I sourced from a New year’s report on their website: Nutmeg’s three-year results: How we delivered great returns for our customers. Such delayed reporting cant become an industry standard. Neither can performance be presented in a company blog post, as a competition outperformance brag, which lacks many of the key requirements suggested in GIPS.

  • Aphrodite, Nutmeg reports 6.1% annualized return for the past 3 calendar yrs. For 2015, a rocky year, 1%.

The lack of GIPS performance reporting from standalone robo-advisors is Odd and contradictory to their mission.

Any actual performance reports that I am missing?

Any robo-advisor showing at least on a monthly basis their actual GIPS performance?

Any industry led reporting standards for standalone robo-advisors, in the pipeline?

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.

7 thoughts on “In search of Robo-advisor Actual Performance. Anything out there?

  1. Performance transparency is definitely more prevalent in Europe, as noted by Nutmeg and Moneyfarm. In the U.S. there is no law that states you have to do this. GIPS compliance is used more in the institutional SMA and hedge fund spaces, and they are enforced by due diligence officers, rather than the Feds. None of the big retail firms like Merrill, Wells, Morgan Stanley, etc, publish advised client returns, because it’s just so easy to put the 7% annualized return of the S&P up there from 1900. Maybe one day this will change🙂 We publish yearly GIPS client returns and also live model performance since 2010 so clients know before they invest.

    Liked by 1 person

  2. Thanks Mike for pointing out distinctions in the two markets (US and Europe).
    Even though the SEC has trained generations and generations to mumble “past performance isn’t indicative…bla, bla” and independent financial advisors are still ranked and evaluated (Barron’s) mainly based on AUM (not performance); digitization in wealth management is forcing everyone to ‘show their cards’.


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