Robo-Advisors — Innovation in a Time of ETFs

Published on 24 Mar, 2017

Automated Investment Advisory Research

Automated solutions can now provide investment advice at costs ranging between 0.15% - 0.50% as compared to the usual 1% fee that traditional investment advisors charge. What started off as experiments in providing low-cost investment advisory tools have spawned over a hundred Robo-advisory services worldwide. 

Could they be the game-changers they’re made out to be?

The launch of Betterment, an online-investment adviser, in 2010 was an important innovation in the investment management and advisory segment. The low-cost wealth advisory support got a lot of good press and a reasonable amount of patronage.  While Betterment is still among the largest independent Robo-advisors around that dole out financial advice based on mathematical rules or algorithms, established Asset Managers have begun to dabble in this class of financial advisory services as well. 

While Robo-advisors are most common in the United States, they’re also gaining traction in other regions of the world such as Europe, Australia, India, and Canada. What started off as a quest for automated solutions now provide low-cost investment advisory that take care of the complete wealth management process, without any human intervention. It has further evolved under institutions like Vanguard and Charles Schwab, who added a human layer on top of this automated system. 

There are over a hundred Robo-advisory services available worldwide right now,  with Vanguard at the top of a list of prominent Robo-advisor as of February 2017.  





      Charles Schwab









      Personal Capital







           U. K.








      Financial Guard



      Rebalance IRA



      Scalable Capital     



    Source: Wikipedia

The assets under management of Robo-advisors are expected to reach $250 billion by 2020. 

What are Robo-Advisors and How Did They Kick Off?

Robo-advisors are a type of financial or wealth advisors that provide automated portfolio management solutions to investors online.  They may incorporate insights of:

  • The Modern Portfolio Theory — with a focus on diversification and asset allocation to attempt maximum portfolio return for an amount of given risk.
  • The Black-Litterman Model — to enable passive asset allocation by using world market capitalizations to attempt to estimate expected returns.
  • Behavioral Asset Management — which focuses on investor returns, and attempts to optimize the returns an investor achieves, including minimizing potential market-timing behavior.

In the aftermath of a global credit crisis and market slumps, there has been significant movement toward passive investments, and the timing bode well for the launch of Robo-advisors. 

Most investments happen in ETFs, and hence, the growing levels of automation bring the total cost of investments down drastically.  Vanguard owes its success to this, enjoying stellar success in just two years and with a starting AUM of $17 billion.  Vanguard’s hybrid service combines automated asset allocation and rebalancing, with access to human advisors via phone or videoconferencing, all of which brought down operational costs from 0.70% to 0.30% per annum.  This cost is obviously in addition to the expense ratios of their ETFs and mutual funds, where the investments are made.   They’ve also managed to reduce the minimum required investment from $500,000 to $50,000 for this scheme.

Vanguard isn’t alone in offering a slew of unique services and advantages either; there are quite a few players in the game with their own advantages to boot:

Best for
Annual Fee
Account Minimum


Access to financial advisor

Portfolios built on client-by-client basis with advisor.

0.30% of account balance.



Charles Schwab


Trusted leader in financial services.


n / a



Overall, IRAs

Goal-based tools help savings, guide asset allocation.

0.25-0.50% of account balance.

One month free management with $10,000 deposit.



Overall and minimizing taxes

Tax efficient direct indexing (accounts $100,000+).

0.25% of account balance.

$15,000 managed free.


Personal Capital

Access to financial advisor + Minimizing taxes

Hybrid service; some tools free; individual securities ($100,000+).

0.49-0.89% of account balance.



Future Advisor


Manages Fidelity 401(k)s for free.

0.5% of balance; several services free.

Three months free.

$10,000 (premium service)


Though Charles Schwab offers the service for free, they insist on having cash holdings between 6%-30%, and that’s where they derive revenue.  In addition, the investor pays trading commissions.

Robo-advisors also support tax-loss harvesting, selling loss-making investments and moving to similar investments in order to optimally reduce your tax liability within existing tax regulations —very useful for investors with taxable investment returns. 

Robo-Advisors — The Road Ahead

Robo-advisors provide investment advisory service at costs ranging between 0.15% - 0.50% of the usual 1% fee charged by traditional investment advisors. They also try to invest in ETFs that have lower management fees, keeping overall costs well under control.  While these cost advantages created some hype in the market, several issues began to emerge; the inability of Robo-advisors to incorporate any suggestions into their model on the fly for instance, or their lack of emotional support when investors needed it, particularly during times of volatility.  As a result, some players introduced human advisors on top of Robo-advisors to address such issues.  While that drove up costs a bit, they were still far lower than traditional advisory services.

The real value proposition of Robo-advisors however, lay in the quality of algorithms used. 

Although there isn’t enough verifiable data available to confirm it, it’s likely that the performance of Robo-advisors vary considerably, even while the underlying risks remain more or less the same.   A Condor Capital study conducted over eight months in 2016 (using a 60/40 mix of stocks and bonds of five popular Robo-advisors) produced the following returns. 

Net return (%)





Schwab Intelligent Portfolios


Vanguard Personal Advisor Services     




*The Wealthfront portfolio was rebalanced on January 15 ‘17 to maintain 60/40 portfolio.   It should have produced 6.71% returns, had it not been rebalanced.

This return comparison doesn’t take into account the total return producing capabilities however, including tax-loss harvesting.

How do these developments augur for active managers, researchers from fund houses, and sell-side firms? 

Well, it isn’t exactly good news.

It wasn’t that different when funds moved from active to passive either, so there’s that. 

Since most investments are in ETFs and passive funds, they were already beyond the reach of research teams and active managers.  Further, larger firms are already building human factors into otherwise robotic support.  This is in line with existing trends where active managers tried to merge active and passive characteristics in order to create Smart Beta — strategies that are proving quite successful.  Multi-asset investments and regime-based asset allocation are also likely to shift toward low-cost processes using technological innovations. 

Will Robo-Advisors Stand the Test of Time?

As with most new, innovative, sometimes disruptive changes, there are questions raised about the business model’s sustainability.

With fees as low as they are and an inability to generate decent revenue from the cash part of the portfolio, Robo-advisors may not generate sustainable revenues.  Most independent Robo-advisors are backed by venture capitalists, and hence, needn’t worry about cash flows. Betterment for instance has received around $ 205 million of VC funding so far.  Larger firms have already begun forays into this area by taking over existing companies to gain entry rather than building their own from scratch.  LearnVest for instance, announced that it has been acquired by Northwestern Mutual for an undisclosed amount. Another company, FutureAdvisor, recently announced that it had been acquired by Blackrock.

It’s probably safe to say that Robo-advisors are here to stay.