Is Your Robo Smarter than a Fifth Grader?

As the popularity of so-called robo advisors has risen, the conventional wisdom that has pervaded the advisory profession is that the discipline of investment management will be “commoditized,” resulting in lower margins and an urgency to justify one’s value through non-investment activities. But a review of the historical performance of the robos over the last three years, a relatively short time period, shows that fear is unjustified.

If the robos were pitted against a fifth grader, consisting of a 60/40 cap-weighted index portfolio, Jeff Foxworthy would easily give the victory to the 10-year old.

Measuring the performance of the robos is no different than assessing any active manager – and virtually all robos engage in some degree of active management, in their deviations from the cap-weighted market and in their asset-allocation decisions. They should be judged over a full market cycle, since active managers typically claim their advantage is in their ability to protect against downside losses. But that would require going back to before the financial crisis, and there isn’t enough data to do that.

The farthest I could go back is three years, using data provided by Backend Benchmarking (BEB), which is when that service began tracking robos. BEB is a spinoff from New Jersey-based Condor Capital Wealth Management, a fee-only RIA. BEB does not receive any compensation from any of the robos it tracks and Condor does not use any robo technology in its operations.

Using the most recent data from BEB, of the 36 different robo providers it tracks, only 11 have a three-year track record. Of those 11, only two outperformed BEB’s benchmark. On average, the 11 robos underperformed BEB’s benchmark by 86 basis points, as shown below:









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To put those nine of 11 robos (82%) that underperformed the BEB benchmark in perspective, consider the SPIVA scorecard that S&P uses to track active managers. As of the end of 2018, across all domestic funds, 81% of actively managed funds underperformed their benchmark on a rolling three-year basis (and that percentage goes up as the time period lengthens). With this admittedly small sample size, robo performance is closely tracking that of actively managed funds in general.