Robo-Advisor Report Card, and Pros and Cons of AI
The second quarter of 2018 was a busy one
for robo-advisors. Hedgeable announced
its impending closure, WorthFM
became history and LearnVest notified customers it was discontinuing its planning and online
During the same quarter,
US Bank and Fifth Third Bank
launched their robo-advisor platforms and SoFi, a fintech lender with
a robo product, introduced checking
accounts with debit cards, further blurring the lines between banking and digital
advice. And U.K.-based Wealth Wizards, an
independent digital advisor with AI capabilities, is exploring a talking robo-advisor.
“Closings are to be expected,” said
David Goldstone, research analyst at
Backend Benchmarking, which publishes
The Robo Report. “The robo-advisor market is maturing. The big expansion phase
Goldstone said he’s still waiting on rollouts from Goldman Sachs through its
Marcus by Goldman B-to-C operation and
from JPMorgan. He’s also expecting more
consolidation among the smaller independent robos, who are dependent on
funding for their staying power along with
profitability, which remains uncertain.
WiseBanyan appears vulnerable because
“it hasn’t achieved scale,” Goldstone said.
The Robo Report compares the performance of robo-advisors for the second
quarter, year to date, one year and two years
for taxable accounts split 60/40 stocks and
bonds held by investors in high tax brackets
and for tax-deferred equity IRA accounts.
This quarter it introduced “Normalized
Benchmarking” for balanced portfolios
in taxable accounts with different equity
and bond allocations to reduce the inher-
ent advantage of portfolios whose equity
allocations topped 60%. Rankings in
this category are based on the port-
folio returns above or below
the normalized benchmark.
Using this methodology,
Vanguard led the pack for
total portfolio returns over two
years ended June 30, trailing
the benchmark by 0.02%. SigFig
followed, returning 0.11% below
the benchmark, then E-Trade, off 0.34%.
The actual annualized returns were,
respectively, 9.11%, 9.33% and 8.95%.
Rankings for equity-only and fixed
income-only taxable portfolios are based
on annualized returns. Here SigFig took sec-
ond place for equity-only and fixed-income
portfolios, returning 15.14% and 0.62%,
respectively, on an annualized basis.
E-Trade was the top performer for equi-
ty-only portfolios, up 15.2% annualized,
while Vanguard placed third, up 15.07%.
In the fixed-income only portfolio,
Schwab led, returning 2.39% on an annu-
alized basis, while Betterment placed
third, gaining 0.24% (Vanguard’s was just
behind, up 0.23% on an annualized basis).
Schwab’s outperformance was due to its
diversified bond portfolio consisting of
international, high yield, Treasury inflation-
protected securities, municipal and corpo-
rate bonds, according to The Robo Report.
That same diversification, however, set
Schwab back in the one-year performance of
its bond-only portfolio, up 0.90% compared
with over 1% for Fidelity Go, SoFi, Vanguard,
Wealthfront and Wealthsimple SRI.
AI Benefits and Obstacles
Financial service firms are interested in
artificial intelligence, but the number actu-
ally using AI is limited, according to a sur-
vey from Broadridge Financial Solutions,
a fintech firm serving brokerages, banks,
asset managers and corporate issuers.
Broadridge, whose stock (BR) joined
the S&P 500 in June, surveyed close to
200 representatives from financial firms,
including wealth managers, banks and
broker-dealers, as well as technology ven-
dors and regulators, asking about their
use of AI, machine learning (ML) and
robotics process automation (RPA).
It found that 80% respondents are at
least assessing the value of at least one of
these processes but only about 22% have
actually put any in production. Thirty-nine
percent of respondents are in the prototype
or pilot-testing stage for these technologies.
Respondents “indicated that data-spe-
cific challenges are preventing their firms
from taking advantage of AI’s potential
benefits,” according to the survey. Just
over 50% cited “data quality and standard-
ization,” while roughly 40% mentioned
data availability, business justification and
cost of implementation as impediments to
using AI and related technologies.
Nearly all respondents recognized the
benefits of developing key AI processes
with other firms or vendors such as shar-
ing costs. One-third of respondents expect
that AI will reduce demand for labor by
10% or less in the next three years. Less
than 5% anticipate a 50% or more drop
in labor demand during the same period.
“AI has the power to completely
transform financial services,” said Mike
Alexander, president of North America
Wealth and Capital Markets Solutions, in a
statement. “However, many capital markets
firms struggle to make a business case for
the investment in AI, especially since their
data is decentralized.” —Bernice Napach
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