Man vs. Machine 🤖

Why I hate my Robo-advisor...and you may too

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Friends, I’m looking forward to kicking off our first Witty Transparency Fund experiment on Monday! In the meantime, I wanted to share a raw thought I’ve been hearing from the Witty community. 


It kept popping up.

In the last month, I’ve had ~50 in-depth conversations with Witty readers. I wanted to learn about our investing goals, setup, and problems.

One feeling voiced time and again was, 

“I split my money between stocks and index funds. For index funds I use a Robo-advisor. I hate it though…”

I use a Robo-advisor too. Yet before these chats, I didn’t have an opinion on it. I set up my account and rarely looked at it. In hindsight, my ignorance was bliss.

Here’s the three main reasons why these Witty members don’t like their Robo-advisor. I now feel the same way.

(Note: Wealthfront is the most common Robo-advisor in the Witty community. They target tech-savvy millennials.).

Returns

Every Robo-advisor user I spoke to said something along the lines of “I feel my Robo-advisor is underperforming.”

Whenever I heard that, I wondered, how is this true? Don’t they just invest in index funds for you? Shouldn’t they get market level returns?

After fetching my login information, I found I’m in the same boat. My Wealthfront time weighted, year to date return is -4.9%. Ouch! For reference, the S&P 500 year to date return is -0.5%.

Bamboozle! How is this possible? Shouldn’t they match the market? Where’s my other ~4.5%?!

After digging, I realized I missed something big in all the emails from Wealthfront I ignored. If you have over $100k in Wealthfront, they put 20% of your cash into a “risk parity” fund by default. The only way to get around this is to log into the app and decline your interest. 

Here’s what risk parity means, according to Bloomberg,

“The idea behind risk parity was popularized by Dalio and his hedge fund Bridgewater, and aims to spread risk equally across different types of assets, based on the historical and expected price swings of stocks, bonds and commodities. The portfolio’s balance is supposed to reduce volatility and provide smoother returns.

In crazy 2020, this volatility reducing fund is vastly underperforming the market. It’s down ~13% this year.

As a 5 year Wealthfront customer, I wanted to give them the benefit of the doubt. Yet as I dug even further, I learned they were even a poor performer compared to other risk parity funds. Here’s an excerpt from Institutional Investor

MPI analyzed 10 risk-parity mutual funds, whose daily net asset values are public...

Among the worst performers were the AllianceBernstein Global Risk Allocation fund, which sunk 18.2 percent year-to-date as of April 9. The risk parity fund from robo advisor Wealthfront lost 18.8 percent. For comparison, a domestic portfolio with 60 percent stocks and 40 percent bonds generated a return of negative 5.9 percent.

Lack of trust

Not only is Wealthfront losing money right now with risk parity, they are also losing customer trust.

Near the top of Wealthfront’s investing page, they define their investing approach. 

“We’re rooted in passive investing, which means we’ll build you a globally diversified portfolio of low-cost index funds. And we aim to maximize your returns by following a few simple principles.”

Wealthfront considers risk parity to be a form of passive investing, Yet industry analysts, journalists, and the Witty members I spoke with, believe otherwise. They consider risk parity to be an active investing approach.

This led to the feeling of a broken promise and lost customer trust. Here’s an example from Twitter:

Dehumanizing

Finally, these Witty members felt Robo-advisors were dehumanizing. In short, one Witty member summarized it well to me,

“When I signed up, they immediately tried to put me into a neat little bucket. What’s my risk tolerance on a scale of 1-10? That’s about it. Screw my preferences. It’s not fun. I can’t talk to anyone about it. I have no control!”

If you’re reading this, I assume you like to pick stocks and believe in your investing ability. You aren’t an index fund purist. Naturally, this M.O. is counter to what a Robo-advisor stands for. Their model is to automatically invest on your behalf with little supervision. 

There’s bound to be tension.

What’s your take?

I’m curious: what's your take on Robo-advisors?

Do you use a Robo-advisor? How do you feel about it? What do you love? What do you hate? Why?

I’d love to hear from you. Feel free to respond to this email! If we get enough good responses, we’ll revisit what the Witty community thinks about this in a future post.

Have a great weekend. See you on Monday!

Anuj


Note: This content is for informational purposes only. It should not be relied upon as legal, business, investment, or tax advice. Your use of the information contained here is at your own risk.