“Not another post on robo-advisors” maybe your first thought. But 2020 and 2025 with projections of either 10% of total AUM or $2 trillion managed by digital platforms; are far away still. So, we will be seeing lot more pivoting in the business models and the stacks, in robo-advisory.
We have already witnessed the commoditization of passive investing; the increase in passive investing; the pivoting towards hybrid digital platforms.
“I want passive, cheap, and online” investing options for relatively low amounts.
Thanks to the fact that over the past 5yrs 80% of active large cap funds underperformed their benchmark indices, passive ETFs remain in demand and the suppliers are responding too.
Morningstar, reports that U.S. fund fees have been declining steadily since 2000, going from an average expense ratio of around 0.90% to a record low of 0.57% in 2016. Still high compared to passive ETFs. ETF.com reports that the price of the “Cheapest ETF Portfolio” for the U.S. market is Less than 0.06% a year.
“Pay attention to my culture” says the American, the German, and every robo-investor
It is standard practice in all digital platforms to have a home bias. German robo-advisors overweight European ETFs, while U.S. tend to use more U.S. ETFs. Solactive’s Robo-advisory (see links below) report states that in Germany, on average 40% of the ETFs are European. In the US, the home bias is higher, with an average of 52% to US ETFs.
More interestingly, Solactive reports the different optimization approaches between US and German robo-advisory platforms. These are the two areas with the largest concentration of robo-advisors. The US is clearly more aggressive in equity allocation for the same risk-profile. Solactive compares 3 different “personalities” and indicates that “, in the U.S., the percentage of funds allocated to equity for a more conservative portfolio ranges from 0% to 47%, whereas in Germany, the percentage of funds allocated to equity ranges from 9% to 30%.”
“Pay attention to my values with all this index investing”
Long term performance on a risk adjusted basis has always been the name of the game in financial investments. But our culture is changing. Whether it is in preparation of entering in the astrological age of “the Age of Aquarius” (shifting from the Age of Pisces) or not; we can already sense the shift in values. Philosophically the “Age of Aquarius” is an era that we care less about money, personal success, and boundaries and more about personal and collective consciousness, social justice, equality etc.
Wealthfront has already responded to client demand to omit buying securities from indices in sectors from four main categories: fossil fuels, deforestation, weapons and tobacco. So clients can click on which categories to omit instead of buying the whole index. That way, a client doesn’t loose the diversification benefit of an index and at the same, is not in conflict with his or her values.
Direct Indexing is part of PassivePlus®, Wealthefront signature suite of investment features which allows investors to optimize tax harvesting from moves of individual stocks. Since summer 2017, Wealthfront clients are able to build their portfolios in a Socially Responsible Investing (SRI) style.
Morgan Stanley Access Investing, the new robo-advisor launched at the end of 2017 already allows investing in thematic startegies that include gender diversity, climate action and other sustainability themes. This new offering is priced at 35bps annually. Clients can choose from indexed ETFs, mutual funds, and thematic strategies.
Betterment has showed genuine concern around the limitations of existing SRI financial products and for now, is using the iShares MSCI KLD 400 Social Fund, which tracks the MSCI KLD 400 Social Index and has large-cap stock exposure. Companies involved in tobacco, military weapons, nuclear power, adult entertainment, and genetically modified crops are screened out. And the iShares MSCI USA ESG Select Fund for tax-harvesting purposes. Both these ETFs have high fees of 50bos compared the average of 9bps for Betterment’s core portfolio.
Personal Capital, the third largest US standalone robo advisor in terms of AUM and with a hybrid approach from the start, is also listening to the increasing interest and demand from clients. For no extra charge to clients, Personal Capital will screen U.S. equities on environmental, social and governance factors. The analytics are provided from Sustainalytics, a provider of ESG research and analytics, to determine best-in-class companies in each domestic peer group.
With this ESG offering, Personal Capital may also be drawing more attention to its hybrid advice model. It is the human advice service of Personal Capital that is a paid service. Increased engagement around ESG investments with clients may increase the conversion from the free service to the paid service.
WealthSimple, the Canadian robo-advsior that opened doors recently in the UK, has also included SRI capabilities in their offering. “We always look to our clients for feedback on which features they want to see next, and SRI has been requested from the first day we launched in the UK,’ said Toby Triebel , CEO Europe to Citywire. It isn’t clear which specific funds have been include but the focus is on investments in cleantech innovation, fair labour standards or low carbon emissions.
Two standalone digital investment platforms that are 100% dedicated to sustainable investing, are OpenInvest and Earthfolio. OpenInvest is a YCombinator and Andreessen Horowitz-backed startup focused on the under-served markets in customized ESG asset management. They offer their services for 50bps flat fee. They have also designed a proxy voting app that just makes it easy to exercise your rights as a shareholder; with a swipe. Earthfolio is approaching sustainable investing with a thorough screening approach on multiple factors.
“Keep winning me.
Pay attention to my values.
Lets show the world that ESG and SRI investing, is good business”
“Robo advisosry: A closer look at the engine-room”, a Solactive report
“As Robo-Advisors Cross $200 Billion in Assets, Schwab Leads in Performance” Barrons.
Map of Robo Advisors in Europe & Germany, Techfluence
The Age of Aquarius, from an astrological perspective
Building Your Socially Responsible Portfolio, Wealthfront
“Our Approach to Building an SRI Portfolio” Betterment
“Socially Responsible Personal Strategy”, Personal Capital
Efi Pylarinou is a Fintech thought-leader, consultant and investor.
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thanks for the interesting post on robo-advisors. Regarding ESG though, I think that Europe has been earlier than the US. My company Diversifikator (www.diversifikator.com) has probably the “oldest” and broadest ESG/SRI online offering. We launched the following portfolios: ESG ETF-Portfolio (Feb. 2016), Islamic ETF- Portfolio (Feb. 2016), German, Infrastructure and Real Estate (direct) Equities ESG (Jan. 2017), ESG ETF- Portfolio Trend, Global Equities ESG (May 2017) and several more will be announced in the near future. The direct equities portfolios have extensive exclusions and are most passive and “Pure ESG”, meaning only using ESG criteria to select stocks. US ESG ETF portfolios from robo-advisors often include non ESG ETFs and some of our online portfolios are unique, meaning that we could find no comparable “offline” portfolio anywhere.
Many greetings, Dirk
Thank you Drik for sharing Diversifikator’s approach and your commitment to this approach.