Aman Raina’s 3-year review of his Robo Advisor portfolio

By Aman Raina, Sage Investors

Special to the Financial Independence Hub

PLEASE NOTE: This review was written in early February before the big correction started in the market.

I can’t believe it has been three years since I opened up my Robo Advisor account. For those new to investing, a Robo Advisor is a new wave of wealth management companies that invest on behalf of others using an online platform and a combination of algorithms and computer coding to identify and manage portfolios. About three years ago these firms were in their early days, but since then they have mushroomed and even traditional investment companies are now offering some flavor of online investment  management services. It seemed quite appealing; however, there was one thing that many marketing materials, blogs, and mainstream media were avoiding (and still are I might add) … do these types of services make money for investors?

Three years ago I decided to try an experiment and find out for myself. I set up an account with one of the big Robo Adviser firms and invested $5,000 of my own money into it. My goal was to go through the process and blog about my experience and more importantly, the results. I said that we need a good five years to really get a handle on how effective these services are compared to traditional wealth management services. Well, we’ve now crossed the 3-year anniversary of my ROBO account, so let’s take a look at how it’s doing now.

The past year has been epic for stocks as literally every major stock index in the world was up in 2017. The average return clocked at 28 per cent, which is an unbelievable return. Hopefully my ROBO portfolio has been able to participate in this epic bull market.

Performance: 

After the first year, the ROBO had lost 2.15 per cent. It had a rough year, but in the second year and third year, ROBO picked up its game. The portfolio generated a 13.2 per cent return in Year 2 and in Year 3 it posted another solid year with a 14.2 per cent return.

The portfolio went up a total of $777.63 in Year 3, of which $132.08 was in dividend income with the remaining $645.55 earned through capital appreciation.  That’s pretty solid. If we go back to when I set up the account three-years ago, the portfolio is up 24.8 per cent. The ROBO portfolio is definitely making it rain. Below is the breakdown of the portfolio. When I set up the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt reflected was compatible with my profile. As I am pretty experienced with investing and have a long-term investment horizon, ROBO determined that a portfolio mix of 85 per cent stocks and 15 per cent bonds would work for me. It has since then retained the same stocks/bonds ratio.  From there ROBO carved out allocations to a variety of equity assets using ETFs to provide the appropriate exposure. Below is the most recent allocation and performance.

Back in January 2016, almost every asset class was losing money. Now [late January: editor] every equity asset class is in the green. The best performer has been the US equities ETFs, which are up 34.5 and 17.2 per cent respectively. It appears the ROBO’s decision to increase the weighting in US equities has paid off.  The Emerging Market and other Foreign Equity components were also pretty solid posting 28 and 20.8 per cent returns respectively. The laggard has been the Canadian Equity ETF, posting a 4.8 per cent return, which is still decent. Increasing the weighting has so far proven to be a great move by the ROBO. The bond components — while small — have been the worst performers, both posting negative returns.

14 per cent return is definitely a solid year, but I wonder if ROBO left any money on the table. In the past it’s been next to impossible to find any performance data for these services, but that is slowly changing. Condor Capital publishes a very extensive scorecard on various American robo advisor services, so while it may be an apples to oranges comparison because of currencies, it’s the best proxy we have at the moment.

It appears on the surface that my ROBO portfolio is holding up against other services in terms of 1-year and 2-year performances. Digging down a little deeper I noticed that these performance metrics were based on an asset allocation of 65:35 for equities vs bonds, which is lower than my ROBO portfolio which comes in at 85:15 mix. When you look at it this way, my ROBO is generating a comparable return that is somewhat lower for its risk profile. Again, ROBO assessment my risk tolerance to be very high and is managing my portfolio accordingly.

Asset Allocation

In my mid-year update I reported that my ROBO had made a pretty significant change in my asset allocation. It decided to increase the weightings in the Canadian and US equity classes. Right now, almost 55% of the portfolio is weighted heavily in US and Canadian stocks, which to me is pretty high. It’s working right now as the market has continued to surge; however, I wonder what will happen when eventually North American stock prices pull back. Just as fast as it has went up, it can go down pretty fast. So that’s a bit concerning.  Other than this, there hasn’t been any major changes in the asset weightings.

The only other change in the portfolio was the decision to sell the BMO Corporate Bond ETF and replace it with the IShares Short Term Bond ETF.  ROBO sent me an email to inform me of the switch and the rationale, which was a great move on their part to show transparency and provide a real-time update. When they rejigged the Canadian and US weightings and added the second US ETF, I never was informed. I only found out when I happened to one day casually peruse one of my statements.  Sending out short messages like this is a great way to keep investors engaged with their portfolios.

The ETFs in the portfolio are also much more different and straightforward then when I started out. Gone are the Purpose ETFs, which were investing in baskets of Dividend, Real Estate, and low volatility stocks. They have been replaced with more generic, low-cost ETFs that are investing in broad based indexes. I never understood the rationale of Purpose ETFs in my portfolio. The only reason I could think of was because I scored in the high in the risk tolerance side, ROBO may have concluded I would take on more specialized investing strategies. I think now ROBO is now much more aligned with its passive investing value proposition that has been branding itself as now.

 Portfolio Costs/Fees

ROBO is much more transparent in terms of fees it charges itself as well as the fees the individual ETFs charge which is good to see. In the last year I paid a my ROBO a total of $24.72 in fees. This is more than double what I paid in 2016 where I pad a total of of $10.84 in fees to the ROBO.

So while my portfolio increased 14.2 per cent, my costs increased 228 per cent (yes I’m being a bit over-the-top) or 0.39% of the total assets. When you add in the Management Expense Ratio (MER) of the individual ETFs, which represents approximately 0.10%, we get a total cost of 0.49% of the portfolio. That’s higher than 2016, where my total costs came in at 0.42% of the portfolio.

A factor to consider is that since I’m investing the minimum $5,000 I’m not really getting dinged much by the ROBO, as there are no fees on the first $5,000. If I were investing $25,000 you would add another 0.5 per cent, which would kick the costs up closer to one per cent. Either way, the fees are still much lower than what you would pay for a portfolio of mutual funds, which is nice to see.

Other Observations: Still waiting for human

Other than the one phone call I initiated with my ROBO during the year to get an explanation on the new asset weightings, my correspondences with my ROBO throughout the year continue to be in email format, often to notify me that my statements are online, or pointing me to some interesting investing articles and profiles.

When the markets were behaving badly, I would get a Keep Calm comfort email and that everything will work out. Since January 2015 when I set up the account and I had to speak to an adviser, I haven’t been contacted by a human being since. I’m not really bothered by it. It’s what I’ve come to expect in this type of platform. If you are a person who needs that human contact or sounding board this service model could prove hard for you.

I’m continuing to be fully invested in the market and I’m made a decent return. Beyond that there isn’t much else I’m seeking. As long as I’m making money and my costs are low, it’s all good.

3 Years In: What do you think? 

I have always said we’ll need at least five years of performance to get a decent idea about how viable  the ROBO advisor model is. While we’re more than half way there, I do feel confident to make a couple of conclusions at this point. I have to stress that my conclusions are based on my own single experience with using a single ROBO service under my own personal circumstances. My experiment is by no means scientific.

1.) The results show that when the markets are humming along nicely, a Robo Advisor service appears to tag along for the ride and while it may not outperform the market (and that’s OK), it appears to generate a very reasonable rate of return under good market conditions.

2.) While a ROBO portfolio uses low-cost ETFs that invest in broad market indexes, it is managed very actively. In the three years I’ve had the portfolio, my ROBO has made changes in the asset allocation three times and has turned over 75% of the portfolio. So if you expect a “set-it and forge it” strategy, you won’t find it here. If this is the case how is this any different from doing this yourself or working with a traditional adviser?

3.) Compared to traditional mutual funds, the Robo Advisor service is cheaper.

What we still don’t know about Robo Advisor services is how they behave in a stressful, weak market. These services have operated under the umbrella of a generational bull market. They should perform well; however, how do they behave in a bear market? How do its clients behave? Will they stay disciplined and follow the plan or will they continue to bail at the first sign of trouble? We just don’t know, but I expect we will find out sooner or later. This will be the big test for this service.

Having said that, three years of investment activity does not provide enough history to show that this type of investing approach is lucrative. I’m not ready to pound the table for ROBO advisers. We still need to see at least a couple of more years of performance, and also a meaningful market pullback instead of the starts and stops to see how these portfolios behave. We just don’t know right now. These portfolios are not battle tested, and more importantly, investors using robo advisers may not be battle tested. How disciplined will they be? I’ll be continuing the journey with my ROBO and I will continue to blog on how it’s evolving as well as on my overall impressions and experience. Our robo adviser journey continues.