
Ask the algorithm: Human wealth advisers are going out of fashion - ryan_j_naughton
http://www.economist.com/news/special-report/21650292-human-wealth-advisers-are-going-out-fashion-ask-algorithm?
======
toomuchtodo
Research shows that active managers rarely beat the market:

[http://www.nytimes.com/2015/03/15/your-money/how-many-
mutual...](http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-
routinely-rout-the-market-zero.html)

[http://money.usnews.com/money/personal-finance/mutual-
funds/...](http://money.usnews.com/money/personal-finance/mutual-
funds/articles/2012/10/12/study-active-funds-consistently-fail-to-beat-
benchmarks)

[http://money.cnn.com/2015/03/12/investing/investing-
active-v...](http://money.cnn.com/2015/03/12/investing/investing-active-
versus-passive-funds/)

EDIT: Disclaimer: I have the majority of my retirement assets in a roboadvisor
(Betterment).

~~~
smtddr
I have tried so very hard to outsmart the market, read so much stuff and this
is the result compare to S&P500:
[http://i.imgur.com/fEZvLod.png](http://i.imgur.com/fEZvLod.png) , for all my
time & energy I could have just dumped all my savings into SPY and call it a
day.

I am now solidly convinced that anyone who beats the market is either win-the-
lottery lucky or has illegal insider info.

P.S., that falling blue-data in 2nd half of the graph is WholeFoods falling
from about $65 to $31.... =/

~~~
toomuchtodo
Here's the breakdown betterment has me in for 90% stocks/10% bonds allocation:

[https://i.imgur.com/IEcWuYC.png](https://i.imgur.com/IEcWuYC.png)

~~~
kasey_junk
For the record that is a very similar allocation to a Vanguard 2040 target
fund.

[https://personal.vanguard.com/us/funds/snapshot?FundId=0696&...](https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT#tab=2)

You might want to a) compare the price of betterment + those funds to the
target fund and b) use that target fund as your benchmark.

~~~
nerfhammer
Don't forget to take taxes into account. Vanguard's Target funds are not at
all tax-optimized, no private wealth manager would put the total/international
bond market funds in your taxable account. IMO this is one feature the
roboadvisors clearly have going for them.

~~~
saryant
Target funds are also clearly geared towards people not yet at the point where
that will make any difference. That's why they have such a low minimum.

They're a stepping stone until you have enough capital to qualify for Admiral
funds.

------
harperlee
All these robo wealth advisers that I know of are basically profiling their
clients and segmenting them in broad categories that are then offered a
combination of passive ETFs.

By having most of the capital in passive funds, active management gets easier,
and so more valuable, so you want to pay for it.

So we might be seeing a flight towards roboadvisers, but the trend won't last
forever, and the equilibrium point is in a combination of both roboadvisers
and human advisers.

So, the human ones, they are not really going out of fashion. They just got a
little competition, as a result of the lackluster returns of some of them.
This is good news for the good ones.

~~~
twiceaday
> By having most of the capital in passive funds, active management gets
> easier, and so more valuable, so you want to pay for it.

I'm not sure I follow. How does this make active management easier and more
importantly how does that make it a better investment?

~~~
aianus
You can front-run the algotraders because you know what they're going to do. A
simple example from Bloomberg View:

"Take American Airlines Group Inc., which joined the S&P 500 after markets
closed on March 20. Because the addition of the carrier was announced four
days earlier, nimble traders had plenty of time to get in front of the less
fleet-footed."

The bigger the index funds get, the more easy money there is to be made this
way.

~~~
tedmiston
> "Take American Airlines Group Inc., which joined the S&P 500 after markets
> closed on March 20. Because the addition of the carrier was announced four
> days earlier, nimble traders had plenty of time to get in front of the less
> fleet-footed."

So, just to be explicit, is the suggestion to short AA right before this
happens, then re-buy once the algotraders settle?

~~~
aianus
No, the suggestion is to buy AA before all the index funds tracking the S&P
500 are obligated to buy it at the same time after it's officially added to
the index.

------
vonnik
This article, published in May, is already somewhat dated, and demonstrates
some fundamental misunderstandings about the market.

Human wealth advisors and robo-advisors only overlap for a limited number of
services, notably asset allocation and rebalancing. Wealth advisors typically
help their clients with tax and estate planning, and make introductions to
other wealthy individuals of interest.

Robos apply algorithms to investments. I know, because I used to work for
FutureAdvisor, a great YC startup that was bought by BlackRock a few weeks
ago.

Secondly, human wealth advisers were never "in fashion" with most people,
because most people do not have the $500K to $1M in net worth to meet their
minimums. Human advisors earn a percentage of clients' wealth, have a limited
amount of time, and have neither the incentive nor the time to accept middle-
class clients. It's a tired refrain, but human experts don't scale. That's why
robos exist. They are stepping into the gap left between the supply of human
advisers and the demands of the so-called mass affluent.

Another fundamental flaw of the Economist piece is to talk about millennials.
Outside of Silicon Valley and Wall St., millennials just don't have that much
money. They are not a good demographic to base a business on, and they're not
even the main customer base of many robos. Again, the middle-class, mid-career
professionals who have been neglected by human advisers are...

------
Dirlewanger
Systematically allocating your assets will only go so far. People don't seek
out financial advisers for asset allocation, they seek them out for the sage
advice that they'll offer for big financial decisions they have in life:
should I go to grad school? Should I move in with my SO? Should I buy this
house when I have $X in savings? A parent died, what do I do with their
estate? etc. An algorithm isn't going to give you that kind of human touch (at
least not yet). Traditional financial advisers aren't going anywhere.

~~~
tedmiston
> People don't seek out financial advisers for asset allocation, they seek
> them out for the sage advice that they'll offer for big financial decisions
> they have in life

I've been wondering lately: When is the right time or what are the right
circumstances to choose to seek out a human advisor especially with regard to
tax efficiency, offshore banking, etc.?

I spoke to one advisor (a friend) who manages HNWIs; he suggested a net worth
of $100k-250k is when it starts to make sense. I'm still curious to find a
general answer.

~~~
poikniok
Offshore banking with 100k?!? You are off by several orders of magnitude
there.

~~~
tedmiston
Sorry, just trying to clarify _some_ of the services they advise about, and
when reaching out for that advise starts to make sense -- not suggesting that
they're right for every client.

------
pnathan
I chatted with a D. Edward Jones advisor years ago, shortly after I got a
full-time job.

My expected wealth accumulation % increase for a while would be eaten up by
his fees(and he was selling only one line of funds, to boot). I nodded
politely, then at home, I did some studying signed up for ETFs based upon my
financial needs.

When I have a large sum of wealth, I will have a lawyer, wealth adviser, and
accountant on retainer in order to design appropriate strategies. I suspect
that this will be > 1M USD.

------
grandalf
As the price of world class portfolio management approaches zero, the massive
gap in investor sophistication between rich and poor diminishes.

Once the poor have access to this engine of wealth, the main issue becomes the
paternalistic need to protect them from themselves... or put another way to
declare morally acceptable risk characteristics of portfolios for those who
might end up on social welfare.

So like motorcycle "helmet laws", we'll have classes of algorithms that are
deemed acceptable and allow the non-rich to grow their wealth.

Our society still bows before investment oracles whose strategic investments
seem to manufacture wealth... but now that human management is accurately
viewed as inferior, the divide between rich and poor is less a matter of skill
than a byproduct of paternalism.

------
thoman23
As the co-founder and CTO of Investmynd, I have strong opinions on the rise of
the "robos". We are building a company based on the premise that high net
worth clients are not just chasing returns, but can truly benefit from the
overall financial guidance that a personal wealth advisor can provide. But in
order to provide value, an advisor must truly understand their client. We
offer tools to capture not only the traditional profiling data an advisor
needs to collect from a client (risk tolerance, cash flow needs, long-term and
short-term goals, etc.) but also behavioral finance tools to help both client
and advisor understand the distinct personality traits that influence every
individual's investing decisions. Are you the type of client that seeks to
maintain a high degree of control over your investing decisions? Do you prefer
to delegate? Are you unduly optimistic? Pessimistic? Are you a collaborator?
Do you prefer to work alone? All of these behavioral tendencies influence how
you invest over time, both at a micro-level (individual stock picking, buy and
sell decisions, etc.) and macro-level (high level decisions such as switching
advisors, moving to a robo-fund, etc.). We firmly believe that advisors can
add value beyond the basic asset allocation services offered by a robo-fund,
as long as they have the right tools to understand how to best serve their
clients.

~~~
shostack
Thanks for sharing these insights.

Curious for your thoughts on the fees assessed by robo-funds compared to
something super barebones like Vanguard's index funds that you can manage your
own allocations on.

Do you see fees charged by these guys as largely overpriced for what they
offer since they aren't offering these other services? Would you say the
majority of the value you add is from these other services?

~~~
thoman23
I'll just say that when it comes to algorithmic portfolio planning, I think
there will continue to be downward pressure on the fees that can be charged.
Basic portfolio planning and diversification services are clearly becoming
commoditized. The traditional high-touch personal wealth advisor will still
provide value to their clients, and both clients and advisors will ultimately
benefit from the improved technology that handles the actual portfolio
management chores.

------
shostack
With the recent HN headline that the bond market could follow suit with the
equities market [1] I do wonder about what seems like a growing shift to what
I'll summarize as "The Bogleheads" approach of simple, diversified, low-fee
ETFs.

Could we be setting ourselves up for a situation where things will crash much
harder than they would if people weren't using these robo-advisors because
Main St. investors will be more "homogenized" in their investment choices?

Not the most educated on these matters, so please feel free to tell me where
I'm totally off-base with this.

[1]
[https://news.ycombinator.com/item?id=10252166](https://news.ycombinator.com/item?id=10252166)

------
jgalt212
As far as 401k money goes, there is no measurable difference between robo
advisor investment allocations and target date maturity funds.

If you have more complex investment goals, or constraints, with your money
(e.g. mix in taxes and estate planning), I can see where robo advisors would
add value. Of course, increase the complexity level too much and the
algorithms might not be able to handle the assignment.

------
cdnsteve
Wealthsimple here in Canada.

