Selecting a Robo-Advisor

Question #2: How many colors can you show in your pie charts that depict my asset allocation?

Robo-advisors are not only known for their low fees for basic services but they also give their clients stunningly beautiful pie charts to understand and visualize investable assets. The pie chart is the robo-advisor’s signature tool in emotionally connecting with you as a client, so ensure you choose a robo-advisor who renders elegant colors and hues that are right for you. Pie chart design matters, and some robo-advisors are much better at it than others.

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The above comes from a super-snarky piece at WealthBox lampooning the media’s obsession with writing regurgitated articles about robo-advisors. Read it, it’s a hilarious sendup of that genre of article.

Reporters seem to be unable to understand that this is all old news – it’s taking software that was once advisor-facing and turning the screen around for smaller investors to help themselves. It’s great, don’t get me wrong, it’s just not all that revolutionary.

On the portfolio side, we’re essentially talking about the equivalent of a lifecycle mutual fund that orients itself to your initial age and then makes changes as you reach a retirement range or goal. BFD, this is 15 year old technology, presented better.

This is not to say that we are not excited about the zeitgeist. I credit Adam Nash at Wealthfront, who is a true visionary, with really kicking the door down and making this a real thing. A year ago, when small investors or those just starting out would email us for help, we had no answer at all! Literally, we would send them out into the world with a “Good luck, sorry.” It made me nauseous because I know about the predatory environment of B shares and third-tier brokerage “solutions” that awaited them. So I’m really glad we have an answer, backed by our technology partner, Envestnet.

The reality is that there are real differences between the current services available and the portfolios are not at all the same. We designed the portfolios for our own automated service, Liftoff, completely independently of what else was out there and we were actually pretty surprised when we looked around afterward. For example, Schwab is overloading its service with a cash component (where it will earn money on the balances) while Wealthfront’s most aggressive accounts have a big overweight to emerging markets. Vanguard’s version is extremely vanilla, as you might expect.

Our own version is based on our investing philosophy. It leaves out a lot of the tropes of asset allocation like small weightings to “real assets” or global bonds that we couldn’t find a compelling reason for in our own research. Some people like to stack up a pie with slices that seem to be uncorrelated but may not end up being so uncorrelated when push comes to shove. Some people include asset classes based on common misconceptions – like the idea that an index of high-yield bonds out-earn investment grade bonds (they don’t, on a risk adjusted basis).

To each their own, I suppose. We like ours best (the first account to open on the Liftoff platform was for my own children), but we’re admittedly biased 😉

If you haven’t checked out Liftoff yet, go here.