9 ms·

Ask the algorithm: Human wealth advisers are going out of fashion

harperlee 11y ago
All these robo wealth advisers that I know of are basically profiling their clients and segmenting them in broad categories that are then offered a combination of passive ETFs. By having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it. So we might be seeing a flight towards roboadvisers, but the trend won't last forever, and the equilibrium point is in a combination of both roboadvisers and human advisers. So, the human ones, they are not really going out of fashion. They just got a little competition, as a result of the lackluster returns of some of them. This is good news for the good ones.
- deleted 11y ago
  [deleted]
- janzer 11y ago
  It seems obvious that a roboadvisor is easier to scale while maintaining its level of performance than a human advisor. So I guess the question is, at what level do the best roboadvisors compare to the human advisors? Also almost certainly whatever that level is currently it's almost surely going to rise.
- twiceaday 11y ago
  > By having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it. I'm not sure I follow. How does this make active management easier and more importantly how does that make it a better investment?
  - aianus 11y ago
    You can front-run the algotraders because you know what they're going to do. A simple example from Bloomberg View: "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." The bigger the index funds get, the more easy money there is to be made this way.
    - tedmiston 11y ago
      > "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." So, just to be explicit, is the suggestion to short AA right before this happens, then re-buy once the algotraders settle?
      - aianus 11y ago
        No, the suggestion is to buy AA before all the index funds tracking the S&P 500 are obligated to buy it at the same time after it's officially added to the index.
  - evanpw 11y ago
    Active trading is what makes prices efficient (passive funds just take the current price as a given, hence the name). The less money that's traded actively, the less efficient prices will be, so the more profitable it will be to trade actively.
  - SnakePlissken 11y ago
    I believe the argument is along the following lines: The more money that is placed into passive indexes (funds that merely attempt to track the performance of something like the S&P500 by owning a proportional, market cap weighted amount of each stock in the index), the less that is being actively managed by a human being or algorithm with the affect of price discovery. With less 'players' in the game acting on their competing investment theses, inefficiencies are expected to widen. In other words, if AAPL is at price X on any given day, that price is the sum total of all buy and sell orders being placed. One can assume that even with a large portion of passive buying today, most involved in trading AAPL are trading on their own assessment of the true value of Apple's stock. If at some future point the majority of money in the market is simply passive/buy-and-hold, the price of AAPL (or any stock/wider index) will be less "efficient" because of the distortion in supply & demand created by an increase of mindless buy orders. Some market watchers have attributed the abnormally placid bull tear of 09-present, at least in part, to this consistent buying. Josh Brown called it the relentless bid [0] and explained how the increased popularity of dollar cost averaging, scheduled index fund purchases, etc could be a major factor. [0] http://thereformedbroker.com/2014/03/05/the-relentless-bid-explained/ http://thereformedbroker.com/2014/03/05/the-relentless-bid-e...
deleted 11y ago
[deleted]
toomuchtodo 11y ago
Research shows that active managers rarely beat the market: http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html http://www.nytimes.com/2015/03/15/your-money/how-many-mutual... http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/10/12/study-active-funds-consistently-fail-to-beat-benchmarks http://money.usnews.com/money/personal-finance/mutual-funds/... http://money.cnn.com/2015/03/12/investing/investing-active-versus-passive-funds/ http://money.cnn.com/2015/03/12/investing/investing-active-v... EDIT: Disclaimer: I have the majority of my retirement assets in a roboadvisor (Betterment).
- smtddr 11y ago
  I have tried so very hard to outsmart the market, read so much stuff and this is the result compare to S&P500: http://i.imgur.com/fEZvLod.png http://i.imgur.com/fEZvLod.png , for all my time & energy I could have just dumped all my savings into SPY and call it a day. I am now solidly convinced that anyone who beats the market is either win-the-lottery lucky or has illegal insider info. P.S., that falling blue-data in 2nd half of the graph is WholeFoods falling from about $65 to $31.... =/
  - toomuchtodo 11y ago
    Here's the breakdown betterment has me in for 90% stocks/10% bonds allocation: https://i.imgur.com/IEcWuYC.png https://i.imgur.com/IEcWuYC.png
    - smtddr 11y ago
      Oh, nice! Now I think I want an "Ask HN" for everyone to post their stock-allocation charts. :)
    - kasey_junk 11y ago
      For the record that is a very similar allocation to a Vanguard 2040 target fund. https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT#tab=2 https://personal.vanguard.com/us/funds/snapshot?FundId=0696&... You might want to a) compare the price of betterment + those funds to the target fund and b) use that target fund as your benchmark.
jgalt212 11y ago
As far as 401k money goes, there is no measurable difference between robo advisor investment allocations and target date maturity funds. If you have more complex investment goals, or constraints, with your money (e.g. mix in taxes and estate planning), I can see where robo advisors would add value. Of course, increase the complexity level too much and the algorithms might not be able to handle the assignment.
cdnsteve 11y ago
Wealthsimple here in Canada.
pnathan 11y ago
I chatted with a D. Edward Jones advisor years ago, shortly after I got a full-time job. My expected wealth accumulation % increase for a while would be eaten up by his fees(and he was selling only one line of funds, to boot). I nodded politely, then at home, I did some studying signed up for ETFs based upon my financial needs. When I have a large sum of wealth, I will have a lawyer, wealth adviser, and accountant on retainer in order to design appropriate strategies. I suspect that this will be > 1M USD.
grandalf 11y ago
As the price of world class portfolio management approaches zero, the massive gap in investor sophistication between rich and poor diminishes. Once the poor have access to this engine of wealth, the main issue becomes the paternalistic need to protect them from themselves... or put another way to declare morally acceptable risk characteristics of portfolios for those who might end up on social welfare. So like motorcycle "helmet laws", we'll have classes of algorithms that are deemed acceptable and allow the non-rich to grow their wealth. Our society still bows before investment oracles whose strategic investments seem to manufacture wealth... but now that human management is accurately viewed as inferior, the divide between rich and poor is less a matter of skill than a byproduct of paternalism.
deleted 11y ago
[deleted]
Dirlewanger 11y ago
Systematically allocating your assets will only go so far. People don't seek out financial advisers for asset allocation, they seek them out for the sage advice that they'll offer for big financial decisions they have in life: should I go to grad school? Should I move in with my SO? Should I buy this house when I have $X in savings? A parent died, what do I do with their estate? etc. An algorithm isn't going to give you that kind of human touch (at least not yet). Traditional financial advisers aren't going anywhere.
- tedmiston 11y ago
  > People don't seek out financial advisers for asset allocation, they seek them out for the sage advice that they'll offer for big financial decisions they have in life I've been wondering lately: When is the right time or what are the right circumstances to choose to seek out a human advisor especially with regard to tax efficiency, offshore banking, etc.? I spoke to one advisor (a friend) who manages HNWIs; he suggested a net worth of $100k-250k is when it starts to make sense. I'm still curious to find a general answer.
  - poikniok 11y ago
    Offshore banking with 100k?!? You are off by several orders of magnitude there.
    - tedmiston 11y ago
      Sorry, just trying to clarify _some_ of the services they advise about, and when reaching out for that advise starts to make sense -- not suggesting that they're right for every client.
- toomuchtodo 11y ago
  I don't think financial coaches are going to go away, because of how poor financial education is in the US in traditional learning environments, but I do believe a lot of money managers are going to be eaten up by roboadvisors.
thoman23 11y ago
As the co-founder and CTO of Investmynd, I have strong opinions on the rise of the "robos". We are building a company based on the premise that high net worth clients are not just chasing returns, but can truly benefit from the overall financial guidance that a personal wealth advisor can provide. But in order to provide value, an advisor must truly understand their client. We offer tools to capture not only the traditional profiling data an advisor needs to collect from a client (risk tolerance, cash flow needs, long-term and short-term goals, etc.) but also behavioral finance tools to help both client and advisor understand the distinct personality traits that influence every individual's investing decisions. Are you the type of client that seeks to maintain a high degree of control over your investing decisions? Do you prefer to delegate? Are you unduly optimistic? Pessimistic? Are you a collaborator? Do you prefer to work alone? All of these behavioral tendencies influence how you invest over time, both at a micro-level (individual stock picking, buy and sell decisions, etc.) and macro-level (high level decisions such as switching advisors, moving to a robo-fund, etc.). We firmly believe that advisors can add value beyond the basic asset allocation services offered by a robo-fund, as long as they have the right tools to understand how to best serve their clients.
- shostack 11y ago
  Thanks for sharing these insights. Curious for your thoughts on the fees assessed by robo-funds compared to something super barebones like Vanguard's index funds that you can manage your own allocations on. Do you see fees charged by these guys as largely overpriced for what they offer since they aren't offering these other services? Would you say the majority of the value you add is from these other services?
  - thoman23 11y ago
    I'll just say that when it comes to algorithmic portfolio planning, I think there will continue to be downward pressure on the fees that can be charged. Basic portfolio planning and diversification services are clearly becoming commoditized. The traditional high-touch personal wealth advisor will still provide value to their clients, and both clients and advisors will ultimately benefit from the improved technology that handles the actual portfolio management chores.
vonnik 11y ago
This article, published in May, is already somewhat dated, and demonstrates some fundamental misunderstandings about the market. Human wealth advisors and robo-advisors only overlap for a limited number of services, notably asset allocation and rebalancing. Wealth advisors typically help their clients with tax and estate planning, and make introductions to other wealthy individuals of interest. Robos apply algorithms to investments. I know, because I used to work for FutureAdvisor, a great YC startup that was bought by BlackRock a few weeks ago. Secondly, human wealth advisers were never "in fashion" with most people, because most people do not have the $500K to $1M in net worth to meet their minimums. Human advisors earn a percentage of clients' wealth, have a limited amount of time, and have neither the incentive nor the time to accept middle-class clients. It's a tired refrain, but human experts don't scale. That's why robos exist. They are stepping into the gap left between the supply of human advisers and the demands of the so-called mass affluent. Another fundamental flaw of the Economist piece is to talk about millennials. Outside of Silicon Valley and Wall St., millennials just don't have that much money. They are not a good demographic to base a business on, and they're not even the main customer base of many robos. Again, the middle-class, mid-career professionals who have been neglected by human advisers are...
shostack 11y ago
With the recent HN headline that the bond market could follow suit with the equities market [1] I do wonder about what seems like a growing shift to what I'll summarize as "The Bogleheads" approach of simple, diversified, low-fee ETFs. Could we be setting ourselves up for a situation where things will crash much harder than they would if people weren't using these robo-advisors because Main St. investors will be more "homogenized" in their investment choices? Not the most educated on these matters, so please feel free to tell me where I'm totally off-base with this. [1] https://news.ycombinator.com/item?id=10252166 https://news.ycombinator.com/item?id=10252166

All these robo wealth advisers that I know of are basically profiling their clients and segmenting them in broad categories that are then offered a combination of passive ETFs. By having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it. So we might be seeing a flight towards roboadvisers, but the trend won't last forever, and the equilibrium point is in a combination of both roboadvisers and human advisers. So, the human ones, they are not really going out of fashion. They just got a little competition, as a result of the lackluster returns of some of them. This is good news for the good ones.

deleted 11y ago
[deleted]
janzer 11y ago
It seems obvious that a roboadvisor is easier to scale while maintaining its level of performance than a human advisor. So I guess the question is, at what level do the best roboadvisors compare to the human advisors? Also almost certainly whatever that level is currently it's almost surely going to rise.
twiceaday 11y ago
> By having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it. I'm not sure I follow. How does this make active management easier and more importantly how does that make it a better investment?
- aianus 11y ago
  You can front-run the algotraders because you know what they're going to do. A simple example from Bloomberg View: "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." The bigger the index funds get, the more easy money there is to be made this way.
  - tedmiston 11y ago
    > "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." So, just to be explicit, is the suggestion to short AA right before this happens, then re-buy once the algotraders settle?
    - aianus 11y ago
      No, the suggestion is to buy AA before all the index funds tracking the S&P 500 are obligated to buy it at the same time after it's officially added to the index.
- evanpw 11y ago
  Active trading is what makes prices efficient (passive funds just take the current price as a given, hence the name). The less money that's traded actively, the less efficient prices will be, so the more profitable it will be to trade actively.
- SnakePlissken 11y ago
  I believe the argument is along the following lines: The more money that is placed into passive indexes (funds that merely attempt to track the performance of something like the S&P500 by owning a proportional, market cap weighted amount of each stock in the index), the less that is being actively managed by a human being or algorithm with the affect of price discovery. With less 'players' in the game acting on their competing investment theses, inefficiencies are expected to widen. In other words, if AAPL is at price X on any given day, that price is the sum total of all buy and sell orders being placed. One can assume that even with a large portion of passive buying today, most involved in trading AAPL are trading on their own assessment of the true value of Apple's stock. If at some future point the majority of money in the market is simply passive/buy-and-hold, the price of AAPL (or any stock/wider index) will be less "efficient" because of the distortion in supply & demand created by an increase of mindless buy orders. Some market watchers have attributed the abnormally placid bull tear of 09-present, at least in part, to this consistent buying. Josh Brown called it the relentless bid [0] and explained how the increased popularity of dollar cost averaging, scheduled index fund purchases, etc could be a major factor. [0] http://thereformedbroker.com/2014/03/05/the-relentless-bid-explained/ http://thereformedbroker.com/2014/03/05/the-relentless-bid-e...

deleted 11y ago

[deleted]

toomuchtodo 11y ago

Research shows that active managers rarely beat the market: http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html http://www.nytimes.com/2015/03/15/your-money/how-many-mutual... http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/10/12/study-active-funds-consistently-fail-to-beat-benchmarks http://money.usnews.com/money/personal-finance/mutual-funds/... http://money.cnn.com/2015/03/12/investing/investing-active-versus-passive-funds/ http://money.cnn.com/2015/03/12/investing/investing-active-v... EDIT: Disclaimer: I have the majority of my retirement assets in a roboadvisor (Betterment).

smtddr 11y ago
I have tried so very hard to outsmart the market, read so much stuff and this is the result compare to S&P500: http://i.imgur.com/fEZvLod.png http://i.imgur.com/fEZvLod.png , for all my time & energy I could have just dumped all my savings into SPY and call it a day. I am now solidly convinced that anyone who beats the market is either win-the-lottery lucky or has illegal insider info. P.S., that falling blue-data in 2nd half of the graph is WholeFoods falling from about $65 to $31.... =/
- toomuchtodo 11y ago
  Here's the breakdown betterment has me in for 90% stocks/10% bonds allocation: https://i.imgur.com/IEcWuYC.png https://i.imgur.com/IEcWuYC.png
  - smtddr 11y ago
    Oh, nice! Now I think I want an "Ask HN" for everyone to post their stock-allocation charts. :)
  - kasey_junk 11y ago
    For the record that is a very similar allocation to a Vanguard 2040 target fund. https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT#tab=2 https://personal.vanguard.com/us/funds/snapshot?FundId=0696&... You might want to a) compare the price of betterment + those funds to the target fund and b) use that target fund as your benchmark.

jgalt212 11y ago

As far as 401k money goes, there is no measurable difference between robo advisor investment allocations and target date maturity funds. If you have more complex investment goals, or constraints, with your money (e.g. mix in taxes and estate planning), I can see where robo advisors would add value. Of course, increase the complexity level too much and the algorithms might not be able to handle the assignment.

cdnsteve 11y ago

Wealthsimple here in Canada.

pnathan 11y ago

I chatted with a D. Edward Jones advisor years ago, shortly after I got a full-time job. My expected wealth accumulation % increase for a while would be eaten up by his fees(and he was selling only one line of funds, to boot). I nodded politely, then at home, I did some studying signed up for ETFs based upon my financial needs. When I have a large sum of wealth, I will have a lawyer, wealth adviser, and accountant on retainer in order to design appropriate strategies. I suspect that this will be > 1M USD.

grandalf 11y ago

As the price of world class portfolio management approaches zero, the massive gap in investor sophistication between rich and poor diminishes. Once the poor have access to this engine of wealth, the main issue becomes the paternalistic need to protect them from themselves... or put another way to declare morally acceptable risk characteristics of portfolios for those who might end up on social welfare. So like motorcycle "helmet laws", we'll have classes of algorithms that are deemed acceptable and allow the non-rich to grow their wealth. Our society still bows before investment oracles whose strategic investments seem to manufacture wealth... but now that human management is accurately viewed as inferior, the divide between rich and poor is less a matter of skill than a byproduct of paternalism.

deleted 11y ago

[deleted]

Dirlewanger 11y ago

Systematically allocating your assets will only go so far. People don't seek out financial advisers for asset allocation, they seek them out for the sage advice that they'll offer for big financial decisions they have in life: should I go to grad school? Should I move in with my SO? Should I buy this house when I have $X in savings? A parent died, what do I do with their estate? etc. An algorithm isn't going to give you that kind of human touch (at least not yet). Traditional financial advisers aren't going anywhere.

tedmiston 11y ago
> People don't seek out financial advisers for asset allocation, they seek them out for the sage advice that they'll offer for big financial decisions they have in life I've been wondering lately: When is the right time or what are the right circumstances to choose to seek out a human advisor especially with regard to tax efficiency, offshore banking, etc.? I spoke to one advisor (a friend) who manages HNWIs; he suggested a net worth of $100k-250k is when it starts to make sense. I'm still curious to find a general answer.
- poikniok 11y ago
  Offshore banking with 100k?!? You are off by several orders of magnitude there.
  - tedmiston 11y ago
    Sorry, just trying to clarify _some_ of the services they advise about, and when reaching out for that advise starts to make sense -- not suggesting that they're right for every client.
toomuchtodo 11y ago
I don't think financial coaches are going to go away, because of how poor financial education is in the US in traditional learning environments, but I do believe a lot of money managers are going to be eaten up by roboadvisors.

thoman23 11y ago

As the co-founder and CTO of Investmynd, I have strong opinions on the rise of the "robos". We are building a company based on the premise that high net worth clients are not just chasing returns, but can truly benefit from the overall financial guidance that a personal wealth advisor can provide. But in order to provide value, an advisor must truly understand their client. We offer tools to capture not only the traditional profiling data an advisor needs to collect from a client (risk tolerance, cash flow needs, long-term and short-term goals, etc.) but also behavioral finance tools to help both client and advisor understand the distinct personality traits that influence every individual's investing decisions. Are you the type of client that seeks to maintain a high degree of control over your investing decisions? Do you prefer to delegate? Are you unduly optimistic? Pessimistic? Are you a collaborator? Do you prefer to work alone? All of these behavioral tendencies influence how you invest over time, both at a micro-level (individual stock picking, buy and sell decisions, etc.) and macro-level (high level decisions such as switching advisors, moving to a robo-fund, etc.). We firmly believe that advisors can add value beyond the basic asset allocation services offered by a robo-fund, as long as they have the right tools to understand how to best serve their clients.

shostack 11y ago
Thanks for sharing these insights. Curious for your thoughts on the fees assessed by robo-funds compared to something super barebones like Vanguard's index funds that you can manage your own allocations on. Do you see fees charged by these guys as largely overpriced for what they offer since they aren't offering these other services? Would you say the majority of the value you add is from these other services?
- thoman23 11y ago
  I'll just say that when it comes to algorithmic portfolio planning, I think there will continue to be downward pressure on the fees that can be charged. Basic portfolio planning and diversification services are clearly becoming commoditized. The traditional high-touch personal wealth advisor will still provide value to their clients, and both clients and advisors will ultimately benefit from the improved technology that handles the actual portfolio management chores.

vonnik 11y ago

This article, published in May, is already somewhat dated, and demonstrates some fundamental misunderstandings about the market. Human wealth advisors and robo-advisors only overlap for a limited number of services, notably asset allocation and rebalancing. Wealth advisors typically help their clients with tax and estate planning, and make introductions to other wealthy individuals of interest. Robos apply algorithms to investments. I know, because I used to work for FutureAdvisor, a great YC startup that was bought by BlackRock a few weeks ago. Secondly, human wealth advisers were never "in fashion" with most people, because most people do not have the $500K to $1M in net worth to meet their minimums. Human advisors earn a percentage of clients' wealth, have a limited amount of time, and have neither the incentive nor the time to accept middle-class clients. It's a tired refrain, but human experts don't scale. That's why robos exist. They are stepping into the gap left between the supply of human advisers and the demands of the so-called mass affluent. Another fundamental flaw of the Economist piece is to talk about millennials. Outside of Silicon Valley and Wall St., millennials just don't have that much money. They are not a good demographic to base a business on, and they're not even the main customer base of many robos. Again, the middle-class, mid-career professionals who have been neglected by human advisers are...

shostack 11y ago

With the recent HN headline that the bond market could follow suit with the equities market [1] I do wonder about what seems like a growing shift to what I'll summarize as "The Bogleheads" approach of simple, diversified, low-fee ETFs. Could we be setting ourselves up for a situation where things will crash much harder than they would if people weren't using these robo-advisors because Main St. investors will be more "homogenized" in their investment choices? Not the most educated on these matters, so please feel free to tell me where I'm totally off-base with this. [1] https://news.ycombinator.com/item?id=10252166 https://news.ycombinator.com/item?id=10252166