Best Of 2016: How Meb Faber’s Robo Service Is Different

September 14, 2016 So you're offering the robo experience with a person customizing it, all for 0.15% for the access to the Betterment platform and the cost of the underlying ETFs; no management or commissions. How are you going to make money with this?

Faber: Well, anywhere from 40-80% of the funds in the portfolios we offer are Cambria funds. It depends on the allocation. So we'll make some from the underlying ETFs. But by comparison, Vanguard is 100% its own ETFs. We also use ETFs from 10 other providers, and most of the portfolios have about a dozen ETFs on the allocations.

We’re agnostic as to the other providers. Being a fiduciary, I believe there are certainly other funds and strategies that other shops do better, or we'll never do. We allocate to other assets and strategies within the accounts. But yes, we’ll make money off the underlying funds. You’re a quant who’s known for your focus on value and momentum. Should we expect all of your robo portfolios to have these tilts?

Faber: We start with a true global market portfolio. A lot of folks think that’s what they have, but most people don't have nearly enough in foreign equities and bonds. That’s our starting point.

Next, we tilt towards value and momentum within all those indexes. And that includes equities and bonds.

Lastly, we look at trend following, which is different from most, and could be up to two-thirds of the portfolio. We enact that through ETFs, of course, but there's some managed futures, trend-following in U.S. equities, and then a global market rotational trend and momentum fund. The goal of those, of course, is diversification. Why are you starting a robo? Has it become one of those “services” everyone has to have today? Or do you think there are needed solutions that don't exist yet?

Faber: It's a couple of things. One, for the longest time, I’ve talked to friends, family, investors, and they would ask me, “Meb, with my retirement or my investment account, what should I do?” And I'd say, “Hey, I'm happy to sit down with you and talk about it, and here are some funds that are great funds, and here's what you should invest in.” But almost every investor and institution I've talked to, they still want someone to do it for them, and they still want someone to talk to.

So I'd invariably talk to these people six months later and say, “Hey, did you buy those funds?” They'd say no. I'd say, “Why not?” They’d say, “Well, I didn't really know how to do it and then I just got busy, and I just don't want to mess with it.”

The beauty of this is it's a solution for a very low cost. And for smaller investors, no commissions make a huge difference for portfolios under $300,000. The commissions could be a bigger cost than the management fee.

From a business standpoint, the reason we hadn't done it yet was because it was an operational headache. Now that we can do it seamlessly with Betterment, it’s just a beautiful solution for people. And we'll see. Ask me next year. We've had very strong investor and advisor interest. We've opened up a couple hundred accounts already in the first week.

And there're a couple of areas that were a big surprise to us. One, we had a ton of international interest, which we can't currently do with Betterment, so we'll look to solve that problem eventually.

The other was the advisors. You've seen a lot of advisor models already, like Envestnet. And the big difference for us is we'd be doing it for zero. So we'll probably start listing it on the various platforms as well at some point.


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