Perspective on Robo Advisor Performance
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
- Robo advice products are a quality option for individual investors and perform in-line with the expectations of a low-cost, passive, well-diversified portfolio.
- The Normalized Benchmark found in The Robo Report is best used to compare robo advisors to each other.
- Research shows individual investors as a whole perform poorly and robo advisors can be a good, professionally managed alternative for self-directed investors.
Recently, Advisor Perspectives published two articles based on the data found in The Robo Report regarding the performance of robo advisors compared to our Normalized Benchmark. We feel it is important to introduce our perspective on the data in our report and respond to the conclusions drawn in the Advisor Perspectives articles written by Robert Huebscher and David Blanchett.
Both articles use the return of the robo advisor portfolio compared to the Normalized Benchmark, a benchmarking method we developed for the report. The Normalized Benchmark is a good tool for comparing total returns of the robo portfolios, but readers should be careful extrapolating the performance compared to the Benchmark as a judgment on the performance of robo advisors as a whole. One article draws the conclusion that underperformance compared to the Benchmark is evidence that robo-advice portfolios are not performing well. We disagree with this conclusion and believe that robo advice portfolios are quality, low-cost, well-diversified portfolios and perform well overall. We have not concluded in our most recent report, or previous reports that robo advisors produce poor performance.
First, the Normalized Benchmark in The Robo Report serves a specific purpose. It is important to understand the Benchmark in order to draw appropriate conclusions. Details of the construction and use of the Benchmark can be found on our website. The Benchmark was designed to allow for the comparison of portfolios with differing equity allocations. When opening robo portfolios to be tracked for the report, we aim to open a portfolio with a 60% equity allocation. For a variety of reasons specific to the provider or the account in our report, not all portfolios have 60% equity allocations. Because the equity allocation of a portfolio is a significant driver of returns, we developed a method called Normalized Benchmarking that allows portfolios with differing equity allocations to be easily compared.