MyPrivateBanking Blog
Daily Comments on the World of Wealth Management

How robo-advisors can make ETF investors smarter

/by Francis Groves, Senior Analyst/

MyPrivateBanking was very pleased to include a profile of Schwab Intelligent Portfolios in our latest report on robo-advisors, published last week, AFTER the launch of the new Schwab service and to be able to make a full assessment of it. Inevitably in such a fast changing area, fresh developments in the robo-advisor sector keep coming and this week we have seen the announcement of the acquisition of LearnVest by Northwestern Mutual. We cover LearnVest in our report, even though we don’t see LearnVest as a full robo-advisor (and neither do LearnVest). However, we do think that LearnVest has some important robo characteristics and its pricing and range of services make it a disruptive force in the industry in a very similar way to robo-advisors. The company’s acquisition by a major financial institution is another example of the way in which corporate strategy is now becoming a major motor of the robo-advisory revolution, a topic that we cover in detail in our latest robo report, which we sub-titled ‘How Automated Investing is Infiltrating the Weath Management Industry’.

John Bogle, the highly respected founder of Vanguard, recently repeated his skeptical views about exchange traded funds (ETFs), saying to FTfm that they were an encouragement for investors to use index tracking in a counter-productive manner. Bogle has been a committed opponent of market timing tactics either by private investors or mutual fund managers and at Vanguard he was a pioneer of index investing. Although many would consider ETFs to be index tracking instrument ‘par excellence’, he’s convinced that investors will be tempted to trade too frequently for their own good. Vanguard’s  own current CEO has come out against Bogle’s criticism in favor of ETFs as a healthy innovation that have lowered the costs of investing for millions of people.

In the light of this debate about the dangers of ETFs, the robo-advisor trend could be a godsend to the ETF industry. Not only are robo-advisors an effective way to encourage people to start investing, they are almost all proponents of planned investing as opposed to impulsive investment decisions. With the robo-advisors around, ETF sponsors can say ‘look, these new robo platforms depend on our products and demonstrate that it’s perfectly possible to use ETFs prudently for investors’ long-term gain.’

Of course, robo-advisors have yet to prove their index tracking commitment in a number of ways. Individual robo-advisors could stray off the path of passive or mainly passive investing and become too smart for their clients’ good. Also, as has often been said, we’ve yet to see how robo-advisor clients behave in a real panic in the financial markets. Finally, we don’t yet have data on how consistently robo-advisor clients are behaving. Are clients sticking with the plan or do they sign up with a robo in a burst of enthusiasm and then lose interest, leaving a perfectly proportioned ‘bonsai ‘ portfolio in their account rather than a full grown tree to provide shelter in retirement or adversity.

On this last point, our view is that some investors will be committed enough to enjoy real benefits and some won’t, but enough people will use their accounts in the way the robo-advisors intend for the robo model to count as a success and to be held up as an example to be followed in the retail investment market.

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