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A new method of managing wealth came into fashion over the past few years promising lower fees and better performance. Robo-advisors are on-line platforms that collect information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client assets. These platforms promise to provide automated, algorithm-driven financial planning services with little to no human supervision. The premise of Robo advisors is that the algorithm will provide better results than a traditional advisor and it will be lower cost since the work is done by a computer.

Unfortunately for Robo advisors and the people that use them, the results do not bear out the claims.

Advisor Perspectives used results from Backen Benchmarking, which regularly tracks the performance of 60 Robo portfolios. The company tracks the companies in the image below and others….

The study shows that ROBO advisors consistently underperform managed accounts. The lower expenses do NOT make up for the lower performance. Not only did they underperform in the debacle of March 2020, they also underperform managed accounts in quarter 1 2020, 1, 2, 3, and 4-year trailing periods (see the table below).

Advisor Perspectives also provides the following conclusions:

  1. “It is possible that, over time, a robo may emerge from the 60 studied by BEB that exhibits the skillfulness to outperform a passive benchmark. But, given the large-scale failures documented in this table, that possibility is unlikely.”

  2. “Investors would be better served in a randomly chosen active mutual fund than in a robo advisor.”

  3. “…there is no evidence that systematic rebalancing either improves returns or decreases risk. Nor is there evidence that tax-loss harvesting adds nearly as much value as is often claimed.”

  4. “…there is scant evidence that anything has been created that will consistently outperform a 60/40 portfolio.”

After all the hoopla surrounding what was billed as the “holy grail” of investing, this is a disappointing outcome for the new industry and a clear win for managed accounts.

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