[Editor's Note: We are rerunning some of our best stories of 2016.]
Mebane Faber, the well-known quant and analyst heading Cambria Investment Management and a growing roster of ETFs, is now behind the latest robo advisor to enter the fray.
His goal is to provide investors with a part-robo, part-human offering that is truly globally diversified, product-issuer agnostic, managed by a team of investment professionals and low cost. Here he tells us why he thinks this is a solution the market needs, and how investors can benefit from it.
ETF.com: What’s the back story behind your decision to launch a robo advisor?
Meb Faber: In general, adoption of the “pure” robos, such as Wealthfront and Betterment, has been relatively slow among advisors. Now, a lot of the ETF custodians, such as Vanguard and Schwab, have been moving into what you would call the robo space.
Vanguard's a hybrid with its advisor model, and Schwab is more of a robo allocator, with no real financial advice going on. But they have a very real structural advantage in that they can use their own funds, whereas a lot of the VC-backed ones, traditionally, don't have their own funds, so they're at a big disadvantage.
At Cambria, we've been managing money since '07. We started out with private funds, with separate accounts, but the barrier for separate accounts has always been, for us, logistical and operational. Now that the technology has caught up, we can offer the separate accounts to a wide audience, and it's operationally doable.
The big difference for us versus a lot of the other robos out there, is that, one, we're one of only four that are currently both an ETF provider and a global allocator: Vanguard, Schwab, Alpha Architect and us.
Alpha Architect did it uniquely on an interactive broker platform, but we partnered with Betterment because I thought it had, by far, the best technology and user experience. Eventually, we'll probably be multicustodian and partner with some of the other shops once they catch up. But I think Betterment is by far in the lead as far as the platform offering.
ETF.com: Why should an investor come to Cambria instead of going directly to Betterment, or even any other robo?
Faber: We totally customize a portfolio. Betterment, and most of the traditional robo advisors, use modern portfolio theory, buy-and-hold investing. And that's fine. That's a reasonable solution. I just don't think it's the best solution. There're a lot of things they do that I think are suboptimal. But that's a more philosophical discussion. They don't tilt toward value and momentum, for the most part. They don't have trend-following exposure.
We did a white paper called "The Trinity Portfolio" that talks about the research behind the way we manage money in this offering, and how it’s different. Investors who are going to be allocating to us on Betterment will find there’re six portfolios ranged conservative to aggressive that are going to look a lot different than what all the other guys are doing.
If you look at Betterment, and Wealthfront, and the historical returns of their allocations, they're all the same; it doesn't really matter. And that’s fine—it’s a great offering, and they're low cost. But for people who want something different, and dabbling in active, as far as I know, we and Wesley Gray as well are the only ones that have the robo as well as the ETF platform that includes actively managed ETFs.
Another big difference is we like to talk to every investor before they start. That's important to get the expectations and everything else right. We call ourselves people-powered, where if you want to call us or come by the office any time, you can. It's less of just a set-it-and-forget-it running. It's like a traditional RIA, except that we're not charging a management fee, and there's no commission, so it's a very-low-cost offering. And we're also going to report performance. It's odd to me that none of the robos report the performance of their portfolios.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: Is there an account minimum? Is it for anybody?
Faber: We set it at $100,000. Eventually, once we get our sea legs, I would expect the minimum to go down very low.
ETF.com: Is any of this going to be marketed as an option for retirement investing? Who is your target client for this robo service?
Faber: The initial rollout was mainly designed for our audience—Cambria clients or those who have followed Cambria for some time—because we've had enough requests for this. And we're not going to do any marketing. But it's open to anyone.
It's a perfectly fine setup for someone who’s in retirement and someone who’s taxable. The tax harvesting is a wonderful benefit for people.
It's a great way to have a holistic solution. People are tired of having what our buddy Josh Brown calls “mutual fund salad,” where they end up buying a fund, and then another, they go on adding, and the next thing they know they don't know what they own, and it's just a mess.
ETF.com: What's been the most challenging thing about starting a robo?
Faber: The biggest challenge to date was waiting for the technology to catch up. There are a lot of 1.0 versions of the solution right now that for a lot of advisors is suboptimal. Many don’t really offer anything other than plain-vanilla one-size-fits all solutions. So the biggest challenge—and I've been writing about this since Wealthfront came to be—waiting and biding our time.
But the cool thing is that within a year or two, everyone's going to have it. And almost every advisor will utilize this technology the same way they utilize email. It's just another piece of the advisor pie. But it's a wonderful benefit to the end investor, because costs are lower, it's a better user interface. It benefits everyone all around.
The initial advisor reaction, in a lot of cases, was a little bit of fear, but if anything, it's going to help free up their time to go do their value-added activities and not worry about asset allocation and rebalancing.
ETF.com: Do you have other ETFs in the works?
Faber: We filed for another eight ETFs. It’s more of the same for us—launching funds that either don't exist or we think we can do a lot better or cheaper. We have a lot of liquid alt-style funds cued up where the status quo in the space is still pretty expensive, so we'd like to offer some that are cheaper and we think better.
Contact Cinthia Murphy at [email protected].