Robo Advisor Rally In ETFs Has A Big Problem

October 30, 2014

Rocket Science?

But here’s the dirty little secret: Constructing a portfolio is not rocket science.

I can teach my kids how to run a mean-variance optimizer plug-in in Excel and how to select a blend of assets on the resulting efficient frontier.

And that’s what, I predict, you’ll see from all the various new platforms that are launching; somewhere between three and five simple portfolios of various tranches of stocks and bonds. They’ll all look vaguely similar to the portfolios Elisabeth Kashner analyzed in her robo-advisor breakdown this fall. They’ll be on a spectrum of conservative to aggressive, and they’ll all look … well … fine.

And indeed, if they do in fact lure investors out of their 100 percent or 0 percent equity portfolio, those investors will probably be better off. Even better if they lure them out of expensive actively managed mutual funds.

So what’s not to love? It’s actually too simple. When things get too simple, people stop paying attention. If something is simple, it often feels like it can’t be that important.

My concern is that we’re heading for a world where every place investors interact, there’s a set of “robo portfolios” sitting in front of them, and investors will be lulled into a sense of “Well, I’m average; I’ll take the average portfolio” and they’ll never think about it again.

They won’t remember to adjust their position as they get closer to retirement. They won’t realize the implications of an early withdrawal. They won’t understand that investing in the stock market while you’ve got credit-card debt piling up is a dumb idea.

Worse still, they won’t think they need a financial advisor, because it’s all being taken care of by computers. It’s understandable. After all, haven’t we all been talking about “investing as a science” for years?

Maybe it is. But people? People are messy.



You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.


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