Is Robo-Advisor Performance the Best Way to Pick a Digital Investment Firm?

Daniel Penzing
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Robo-Advisory Performance Over the Past Few Years

Over the past few years, a lot of companies have set up robo-advisories to take advantage of the popularity and success of several early companies such as Wealthfront and Betterment. Is this popularity a good thing? It’s hard to judge the effectiveness of some of these early plans since there’s little to really gauge them against. And, they’re still rather new. But, if you look at robo-advisors in terms of the average performance, it’s interesting how they compare to some of the more established investment firms.

Giving them a try for yourself is probably the best way to make a judgment about whether they’re worth investing in. But, if you’re not ready, or you just want to keep your options open, it’s nice to be able to easily compare how they stack up against established firms. Here’s a quick look at 15 popular retirement firms, along with their latest year-to-date (YTD) performance. You can see that as of 11/21/16, the average return for these firms was a little over 6%.

First Financial Trust TrimTabs Capital Advisors Schwab S&P 500 2016 Close 21.53 22.01 22.12 2.10 1.5% 11.

Robo Advisors Aren’t All Alike

Robo advisors are rising in popularity because they provide a convenient way for investors to manage their portfolios without hassling with researching different investment alternatives and managing the portfolios themselves. However, investors need to be careful about how they compare robo advisors because the services differ widely among the various firms. Some of the major distinctions include the following:

Different Licensing and Registration in Different Jurisdictions

Some robo advisors are fully licensed entities that operate in different jurisdictions with their own board of directors. Other robo advisors are merely financial service companies that are authorized to perform digital investment advice in a country or state.

Different Digital Investing Strategies

Some robo advisors focus on index-based and passive investments, while others are more aggressive and invest to a greater degree in low-cost but high-risk alternative investments. It’s not clear how these differences will persist over time, but it’s important to recognize them initially.

Different Fees

Fees depend on the amount of assets managed by the robo advisor and vary between robo advisors. Therefore, it is important to consider the whole picture, including fees, before choosing one.

Different Ongoing Monitoring and Client Service

Most of the robo advisors offer monitoring and client service, but the quality and frequency of monitoring can vary, as can the amount of service. Some robo advisors also offer more frequent rebalancing than others.

What’s the Best Way to Choose a Robo Advisor?

Most investors research, read reviews for and test-drive potential advisors. But what if there was another way? A better way? A more efficient way?

Now there is: performance.

Robo advisors are a growing market segment. Often called Automated Advisor Services (AAS), they provide digital investment advice.

Not too long ago you used to have to pay for that advice, now you can get it for free thanks to robo advisory firms. Robo advisors use algorithms to provide investment advice based on your goals and risk tolerance.

A key metric used to evaluate performance is the Return On Expense Ratio (ROE). ROE compares how much more your investments increase in value compared to their cost.

A closer look at your portfolio can take into account both gains and losses and tell you what your investment return would have been if it were made in the US stock market. It’s a pretty crude way to look at a return, but it has the advantage of being very easy to calculate. And this is where performance comes in.

The top 5 robo advisors have had a 20% performance over the last year. Unbelievable.