
The Rich Are Already Using Robo-Advisers, and That Scares Banks - frostmatthew
http://www.bloomberg.com/news/articles/2016-02-05/the-rich-are-already-using-robo-advisers-and-that-scares-banks
======
patio11
Investment advice is one of comparatively few fields where the quality of it
available at $50 million in net worth is indistinguishable from $50k [+], but
the price is 1000x higher.

Use a roboadvisor (or a moral equivalent like a target age retirement fund
from Vanguard). If you need someone to talk to, the magic words are "fee-only
financial planner" \-- should cost on the order of $100 to $200 a year for a
sympathetic ear that can tell you "Yep you're still on track and not doing
anything insane."

Edit: forgot the jargon here -- some fee-only planners still charge a
percentage. You want someone quoting a _flat_ fee or hourly rate.

[+] No financial planner has predictably better-than-market advice regarding
investment choice than any other planner -- though heaven only knows how many
intimate they do. To the extent they provide a valuable service it is similar
to an accountant's: they can hear the totality of your situation and tell you
about options/factors you may not have considered, allowing you to sleep
better.

A representative question: "What's a good way to save for college given we
have a 5 year old? What type of account? What general plan? Ballpark how
much?"

~~~
theli0nheart
I don't think this is true at all. If you consider "investment advice" to be
as simple as "here is what your target allocation should be based on your risk
tolerance, so let me just call up the trading desk and have them execute the
orders to get you there", then sure.

When you pay for "investment advice" at the $50 million net worth price tier,
you're paying for access to private equity deals, real estate investment
opportunities, a tax advisor who can tell you how to be structure a deal
abroad, etc. It's not as simple as plugging in your salary and age into a
webpage and having a robot buy and sell stocks for you.

~~~
patio11
You're not getting much "access to PE deals" when your portfolio has only ~$5
million to allocate to "everything in the world which is not publicly traded
stock or bond fund" but I'm sure someone will happily represent that they can
arrange that for you if you want to pay $500k per year.

You'll get a pretty nice report of your portfolio and (market) returns. Spiral
bound and everything.

If you want an accountant for international issues, I question the wisdom of
doing that unless life/business naturally throws them your way, but $500k buys
an awful lot of hours from someone who knows the transaction and localities
involved, which your investment advisor does not. (Will every investment
advisor in the Chicago phone book happily take a $50 million client who wants
to spend $5 million on a modestly nice house in Tokyo? Yes. Do any add value
to that transaction? Well, maybe one does. Could you find much better advice?
Oh heck yes.)

~~~
lucisferre
Speaking as someone who has worked in this industry, you appear somewhat
misinformed about how high net worth individual (HNWI) typically invest. Large
multi-family office firms pool investments from multiple wealthy individuals
(usually investable assets of at least $5M or more) and can access private
equity, real-estate deals, commercial mortgages and more. These firms manage
multiple billions of dollars, which doesn't make them huge by any measurement,
but they are more than large enough to access investment opportunities like
these as well as create sufficient liquidity for their clients.

Wealthy individuals have access to investment strategies that resemble far
more the philosophy of large pension funds than that of robo-advisors. (You
can also check out Tiger 21, a sort of investment club for Wealthy people,
they post their recommended asset allocations on a regular basis.) They also
tend to be more focused on capital preservation and minimizing volatility than
strictly beating the market. Their portfolios are typically highly diversified
outside of publicly traded assets to accomplish that.

Finally, the firms that work with them offer significantly more for their
money. Detailed estate planning and legacy planning, tax planning, corporate
tax planning, and advice on charitable foundations and more.

While I do agree with some of what you are saying about how "advice" is
priced, particularly when it comes to the mass market, there is definitely a
point in the wealth of an individual where there couldn't be more points of
difference between what people get in terms of financial advice.

Source: I've worked at a wealth management firm that dealt with HNWI for quite
some time.

Edit: Just to add a bit on the different this makes for HNWIs

At the firm I worked at their client's biggest losses throughout 2008 were no
more than 6-7% (after fees were considered), while at the same time being
invested in assets that yielded nearly that much in cash flow through
dividends, interest, etc. that same year. Since a portion of the portfolio was
also invested in public equities (around 30%) and because these client's could
easily stomach the markets considering their personal performance they were
able to ride it back up without fleeing to cash like so many others did.

One of the problem smaller investors face is that in major market crisis
situations almost all publicly traded assets take a hit as the mass market
migrates to cash. If you follow the herd (as most obviously do or they
wouldn't be the herd) you regularly miss out on the benefits of these market
movements.

~~~
dap
> Wealthy individuals have access to investment strategies resemble far more
> the philosophy of large pension funds than robo-advisors.

I know these are naive questions, but here goes: do those pension funds differ
greatly from large university endowments? How do those differ from what one
can achieve using a combination of cheap index funds? Ramit Sethi famously
recommended an allocation based on David Swensen's experience managing the
Yale endowment. You can find index funds to match that reasonably well. How
different will that be from what Yale or a pension fund actually does?

~~~
lucisferre
They have similar goals, capital preservation, consistent cash-flow so they
don't deplete the principal. I'm in Canada so examples we often cite are the
Canadian Pension Plan (CPP), Ontario Teacher Pension Plan (OTPP) and the
Ontario Municipal Employees Retirement System (OMERS). All of these do a lot
of private equity investing and OMERS in particular has invested in a number
of Canadian tech companies and IPOs, incuding recently Shopify and Hootsuite.
All of them have had quite impressive and consistent results as well.

The problem with using public index funds to mimic these managers asset
allocations is the higher volatility of publicly traded assets. For example in
2008 widespread panic caused people to sell their mutual funds and flee to
cash which widely hold a variety of assets, so all of them suffered. This
included publicly traded Real Estate Investment Trusts (REITs). At one point
they were selling for 80% of their on paper asset value, which was entirely
irrational. Many money managers that typically invested privately in
commercial real estate because of that volatility took that opportunity to buy
public REITs at a discount.

That being said, you can definitely do a decent job of adding asset class
diversification with modern ETFs (and the market for these keeps growing).
There are now infrastructure ETFs, REITs (Vanguard's REIT is really well
priced), covered call ETFs, etc. Just don't expect to get exactly the same
results of these managers and expect to have to handle larger volatility.

That being said, if you can weather these market movements, and you are saving
regularly, volatility can be a good thing, if you can take advantage of lower
asset prices with ongoing contribution then that is great.

~~~
guelo
Taking advantage of big market crashes is difficult when your whole portfolio
tanks. I've been wondering about keeping ~10% of my funds in reserver in safe
cash-like assets in order to be able to move in when the whole market tanks.

~~~
vehementi
That still counts as timing the market and is Known to be ineffective. What if
the market doesn't tank and you sit in cash for a long time? If it does tank,
how will you know when is the true bottom for you to invest your last 10% in?
Etc.

------
Veratyr
Anyone interested in robo-investing might also be interested in Quantopian
([https://www.quantopian.com/](https://www.quantopian.com/)).

It's marketed as a platform that facilitates competition for the best trading
algorithms but really, algos can be as complex or as simple as you want. A
simple monthly portfolio rebalancer takes ~5 lines of code (handle_data is
boilerplate required by the platform):

    
    
      def initialize(context):
          schedule_function(rebalance, date_rule=date_rules.month_end())
          
      def rebalance(context, data):
          order_target_percent(symbol('IVV'), .6)
          order_target_percent(symbol('MUB'), .4)
          
      def handle_data(context, data):
          pass
    

Plug that in, backtest it (it has a pretty comprehensive backtesting and
research suite) and add your Interactive Brokers or Robinhood account details
and you're off.

It's all free as well.

Note: I have no ties to Quantopian, I just discovered them after being
disappointed by how little flexibility Wealthfront and Betterment offered me.

~~~
jacques_chester
Rebalancing your portfolio requires buying and selling shares. In most
countries that will attract capital gains taxes, often affected by when you
bought those shares.

If you care about tax efficiency -- which can severely deplete your on-paper
returns -- then it's not really ~5 lines of code at all.

If you're looking for dumb-and-good-enough, delegating the fiddly rebalancing
problem to someone with economies of scale isn't really so bad.

~~~
Veratyr
Rebalancing is the service offered by Wealthfront and Betterment though. The
same downsides of rebalancing should apply to them as well, no?

------
maxxxxx
Does the market still function as a market if everybody uses index funds or
robo advisers? The market should reflect the opinions of participants about
individual companies but with automated tools the market seems to get
disconnected from economic reality.

~~~
irq-1
The market isn't losing valuable insights from people who are investing in
index funds. Even if they were confident enough in an individual stock to buy
shares, that doesn't mean they have any real insight about the company. For
example, thinking RHT is a good buy at 63 doesn't demonstrate any insight
about Red Hats business, management or market.

I suspect the opposite is true: the market would be __better __if people
invested in index funds rather than individual stocks when they didn 't have
any insight about the company. I don't have definitions to separate company
"insight" from the more speculative information, but the distinction seems
real enough.

~~~
jlebar
> The market isn't losing valuable insights from people who are investing in
> index funds. Even if they were confident enough in an individual stock to
> buy shares, that doesn't mean they have any real insight about the company.

Well, but index funds and individual stocks aren't the only things that retail
investors can buy. A lot of money is moving out of actively-managed funds too.

------
AndrewKemendo
My friend Ben Goertzel's AI Hedge fund [1] also just started trading publicly:
[http://aidyia.com/](http://aidyia.com/)

[1][http://www.wired.com/2016/01/the-rise-of-the-artificially-
in...](http://www.wired.com/2016/01/the-rise-of-the-artificially-intelligent-
hedge-fund/)

~~~
jnbiche
Note bene: Please don't downvote these kinds of comments. I have no ties to
AndrewKemendo, his friend, or his friend's venture, but I greatly appreciate
that HN is one of the few forums where users are generally encouraged to
promote personal projects or projects of friends/acquaintances as long as they
are 1) on topic, and 2) tastefully done (ie, don't spam a post with multiple
promotional comments) and 3) any ties disclosed.

This post observed all 3 of these general guidelines, and as a result, I got
to learn about a very interesting project.

So particularly if you're relatively new to HN, and just got the downvote
button, please let these posts stand as is, and don't downvote. HN isn't like
many online communities in that moderate amounts of self-promotion are OK
here.

~~~
skybrian
It's off topic since it isn't about investment advisers. Seems worth
submitting as a top-level story though.

~~~
ajross
How is a link to an "AI hedge fund" not relevant to a discussion about "Robo-
advisers"? Seems like nitpicky semantics to me. I was genuinely interested
anyway.

~~~
zo1
I would have preferred some sort of comment by the poster as to _how_ they
relate, for background. Or perhaps, how one is better than the other. But just
throwing a link out there because it's semi-relevant to the topic being
discussed, even with full disclosure, seems like a very spammy thing to do.

~~~
AndrewKemendo
Good point. I threw it out there cause I was multi-tasking, and busy but
thought it would be interesting.

I can see how it would be spammy, though considering that it's not a product
available to people it wouldn't really benefit them in the same way as other
products.

Either way, the relevance is that "robo-advisory" services will likely fall to
AI systems sooner rather than later. That these "robo-systems" are taking off
at all, means that people are comfortable handing over those decisions
knowingly to machines. As they get better, it would be irresponsible to have a
human managed fund - in the same way it will be irresponsible to get into a
human driven car.

~~~
skybrian
There are engineers working on improving Google Search. There will be
engineers working on improving self-driving cars. There are also people
working on making improvements to chess-playing bots and Go-playing bots that
play the game far better than they could.

Similarly I expect there will always be people looking for ways to improve
trading performance in the stock market, even if the strategies are automated
and they're making optimization decisions multiple steps removed from the
actual buy or sell decision. The nature of the job changes, but the goal
remains the same.

But that's professional trading. The kind of trading needed for personal
finance seems much less technical and could more easily be automated, since
most people aren't looking to try out experimental stock trading strategies
with their own money. If machine learning gets applied I think it would be
more about understanding and communicating with the customer better.

------
samfisher83
The data says most managers will not out perform the index. So instead of
trying to beat the market you should just find the lowest expense index fund
and put your money in there. Lower your risk by risk pooling. Avoid the Fees.
Profit.

~~~
coliveira
Wrong. Even if everybody invested in index funds, you would still be subject
to the market fluctuations and the very important decision of when to
buy/sell. For example, for the period of 1999/2012 the gains in an index fund
are very small or negative. So, although reducing your fees is a smart move,
it doesn't automatically translate into profit as you imply.

~~~
dap
The NYT has a useful visualization of S&P 500 returns over various periods
since 1920:

[http://www.nytimes.com/interactive/2011/01/02/business/20110...](http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-
graphic.html)

------
tejaswiy
I'm yet to see value in using Robo advisors over using a target retirement
fund from Vanguard or basic self balancing between stocks / bonds.

~~~
ajmurmann
Do you know if this is actually very different from one of Vanguard's target
retirement funds? Taking a brief look at Betterment's portfolio make it seem
like the distribution is almost identical. Did I look at the wrong offering at
Betterment?

~~~
gst
The retirement funds are somewhat inflexible if you want to change your
allocations, but you could just get a three-fund portfolio instead:
[https://www.bogleheads.org/wiki/Three-
fund_portfolio](https://www.bogleheads.org/wiki/Three-fund_portfolio)

The only advantages that I see in Robo advisors are that:

1) They reduce the human impact on the portfolio: If the stock market is
crashing you want to regularly rebalance your bonds into stocks to keep your
original target allocation. If you need to do this yourself manually there are
probably lots of people who won't do this when the market is crashing.

2) You don't need to take care of TLH yourself. But then again TLH is pretty
simple to do yourself.

However some disadvantages are:

1) Those Robo advisors are quite expensive. Wealthfront charges an annual rate
of 0.25% on top of what the ETF charge themselves. So if you have a $500k
portfolio you're paying $1250 per year to Wealthfront.

2) There's a lock-in: Wealthfront's feature to trade individual stocks instead
of ETFs sounds nice, but it won't be easy to move these stocks somewhere else
and to manage them yourself. And selling all of those stocks won't be an
option either, if this incurs capital gains taxes.

~~~
xur17
The TLH part is a good point - I manually did that twice last year, and making
sure you're doing it properly is a pain.

Unfortunately there aren't any roboadvisors (at least that I have found) that
take your company 401k into account as well. I really want a roboadvisor that
sits on top of all of my accounts (similar to mint), and either makes the
trades for me, or emails me a list of trades to make (if the automation part
is too hard to start).

~~~
AjithAntony
Futureadvisor and sigfig can trade at your brokerages.

------
NelsonMinar
The Economist had an article about robo-advisors recently which is much more
skeptical. I have no idea which view is correct, just something worth reading.
[http://www.economist.com/news/finance-and-
economics/21677245...](http://www.economist.com/news/finance-and-
economics/21677245-growth-firms-selling-computer-generated-financial-advice-
slowing-does-not)

~~~
Riod
Pretty spot on

------
caseyf7
I would really like to see some transparency on these portfolios. It is really
hard to find performance data on these funds. Has anyone benchmarked these on
their own?

~~~
loeg
They tend to pick an asset allocation and stick to it (plus some automated
whizz-bang stuff like rebalancing or tax-loss harvesting). Once picked, the
asset allocation is a bunch of index funds. In general index funds are very
good at tracking their benchmark indices.

So it's mostly a question of, do they do a good job of picking asset
allocation from the start?

------
matwood
This was bound to happen because fees for an in person advisor are
astronomical. Robo-advisors or target funds are great for the fire and forget
it investor. If you want to spend a small amount of time, you can save the
.25% many of the robos charge and just reallocate on your own every quarter. A
broker like TDA offers commission free trades for 100s of ETFs. Just so
happens, most of these ETFs are the same ones Wealthfront and Betterment use.

------
orionblastar
I had a project I wanted to do that analyzes the books of public companies and
finds the stocks with the best debt to equity ratio to find good ones to
invest in.

The problem is that data is hard to access, and sometimes you have to pay a
company to get access to it. There is this Edgar system but it is mostly XML
files and I don't know how to navigate it to find the right one. I'd need an
API that lets me pick each stock and return the values I want to store in a
database so I can do analysis on them to find the best debt to equity ratios.
When a company has a lot of debt it is usually a sign that it will struggle in
the future.

But yeah Robo-Advisers are very popular right now, and banks should be scared
as it takes away chunks of their business. There used to be Excel spreadsheets
that did Candle Stick charts and other stuff to find stocks to pick. Stuff
like that got automated into AI routines.

------
norswap
Or form your own damn opinion: [https://www.farnamstreetblog.com/2014/08/what-
makes-warren-b...](https://www.farnamstreetblog.com/2014/08/what-makes-warren-
buffett-a-great-investor/)

~~~
jbpetersen
As long as your opinion isn't objectively wrong.

------
jld89
Has someone used Schwab robo-advisor? Can someone recommend one?

~~~
AjithAntony
The schwab one, "Intelligent Portfolios", has been criticized for keeping a
large(up to 7%) cash position, and stacking the allocation with some high cost
"Fundamental" schwa index funds.

Betterment and Wealthfront, would be the biggest players. WiseBanyan is
interesting becuase there is not fee. Sigfig is interesting becuase it trades
at your existing brokerages.

------
dorfsmay
I hate when sites hijack the back button!

