Picking the right robo-advisory firm (Part 1)

Picking the right robo-advisory firm (Part 1)
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ROBO-ADVISORY firms will be able to thrive in the event of a global financial crisis, and potentially produce better returns compared with human financial advisers and active fund managers, says Chris Brycki, the founder and CEO of Stockspot Pty Ltd, Australia’s first online automated investment adviser and fund manager.

“The evidence just doesn’t stack up. Human financial advisers and traditional active fund managers generally have a poor track record of letting their emotions as well as financial incentives get in the way of sensible investment decisions.

“Scores of advised clients went into the global financial crisis over-leveraged as well as overexposed to the wrong, risky investments. The same has happened in the previous cycle like the tech boom in 1999, when brokers and advisers were overzealous and pushed clients into riskier and riskier stocks as markets rose,” he tells Money+Wealth in an email interview.

Instead of adding risk when things are going well, Brycki says robo-advisers take the opposite approach of reducing exposure to profitable investments after periods of gains. 

“Rebalancing portfolios in this way is the industry best practice, and is much easier for a robot to manage than a human adviser who is prone to herd mentality and emotions when markets are hot. We believe our clients are very well positioned for all types of markets.”

Brycki has spent most of his career as a portfolio manager at UBS (a global financial service company based in Switzerland) and hedge fund BlueLake Partners before setting up Stockspot in early 2014. He will be speaking at the World Capital Markets Symposium 2015 in Kuala Lumpur, organised by the Securities Commission Malaysia, on Sept 3 and 4.

While Stockspot is only accessible to Australian investors, Malaysian investors can invest through other robo-advisers in the region. This includes 8 Now!, the first robo-adviser in Asia, started by the online brokerage firm 8 Securities Ltd, which is based in Hong Kong. UK-based Nutmeg has also opened up its offering to international investors excluding those from the US.

Robo-advisers have taken countries, especially the US, by storm in the past five years. At the end of 2014, assets under management for the 11 leading robo-adviser firms in the US had grown to a total of US$19 billion, 65% growth over an eight-month period, according to Deloitte’s report titled “Robo-Advisors: Capitalising on a growing opportunity”.

In the next five years, US robo-advisers are projected to achieve total assets of US$2.2 trillion, based on another projection by management consulting firm AT Kearney. However, the nascent industry still has a lot more room to grow compared with the US$17 trillion in assets held by traditional fund managers.

Having started his firm 18 months ago, Brycki believes it is only a matter of time before robo-advisers are set up locally.

“The term ‘robo-adviser’ was new to Australia when we launched 18 months ago, but now, barely a day goes by when I don’t see the term in the news somewhere.

“The success in markets like the US, UK and Australia will see automated investment services emerge in Malaysia,” adds Brycki.

How have robo-advisory firms performed so far?

Most robo-advisers say they can achieve a better performance due to their low fees, optimal allocation, tax-loss harvesting (the practice of selling a security that has experienced a loss to offset taxes on both gains and income) and automatic portfolio rebalancing. But how true is this?

In his article “Assessing the 2014 robo- advisor performance”, Roche Cullen, the founder of Orcam Financial Group (a US financial advisory firm) notes that the returns from robo-advisers for 2014 were not good and “they certainly don’t come close to the exaggerated claims of adding up to 4.6% in ‘additional returns’.”

He says large robo-adviser firms like Betterment and Wealthfront in the US have seen some of their products merely mimic the index of another investment management company — The Vanguard Group.

For instance, the Betterment aggressive portfolio “almost exactly mimics the Vanguard Total World Index”. And as a result, the portfolio reflected almost the same return of the index it mimicked and significantly underperformed the S&P 500 index. For 2014, the 12-month return from the S&P 500 index was 13.46% while the Betterment portfolio was 3.43%.

“In essence, Betterment’s aggressive portfolio resulted in portfolio degradation and charged you a premium over a Vanguard Indexing account for it. Even worse, you could have achieved the same return with one simple fund as opposed to trying to implement the fancier-looking six-fund Betterment portfolio.”

Instead, Nash believes it might be more worthwhile for investors to open an indexing account with an investment management company to invest directly into ETF funds, rather than paying an extra premium to a robo-advisor firm which doesn’t add much value for the investors and charges a premium on its service.


This article first appeared in Money + Wealth, digitaledge Weekly, on Aug 31 - Sept 6, 2015.