Oct 4, 2023

X X What You Need to Know Morningstar gathered suggested robo portfolios for two different client profiles. Recommendations for each investor varied sharply. Robo-advisors also differed in questions they asked potential clients. Investors shouldn’t assume that all robo-advisors will produce similar portfolio recommendations, according to a recent analysis from Morningstar . The data suggest that individuals interested in choosing a digital advice platform should first do some research to understand a service’s offerings. Robo-advisors’ recommended portfolios can vary significantly, Morningstar Research Services portfolio manager Amy Arnott noted in a recent column. As a follow-up to the research firm’s annual robo-advisor survey , Arnott asked an intern to dig into data to learn which asset allocations various digital advice services would suggest to two hypothetical investors — one aiming to make a down payment on a house in seven years and another investing funds for retirement in 25 years. Morningstar assumed that hypothetical investor A was 30 years old, earning $80,000 and seeking to save $50,000 for a down payment. This investor would have a $10,000 emergency fund, $50,000 in retirement savings and $10,000 in a taxable account earmarked for the robo-advisor portfolio, with plans to contribute $250 a month. For investor B, the research team assumed the client was 40 years old, earning $100,000 and building toward a $1 million retirement nest egg. This imaginary investor had a $10,000 emergency fund and $100,000 in an IRA to be used in the robo portfolio, with plans to contribute $500 every month. Morningstar also assumed that both investors had moderate risk tolerance. “The results were eye-opening,” Arnott wrote. Among the findings: Many Robo-Advisors Require Registration for Access to Questionnaires While Morningstar included 20 robo-advisors in its study, most required investors to establish an account or register by email to answer risk-tolerance questions, she wrote. Only seven firms allowed investors to go through the process without signing up, she said. “This lack of transparency is unfortunately pretty common in the digital advice industry,” Arnott wrote. “Investors often can’t access basic information about how their money will be invested until they actually sign up with a provider. That makes it impossible to determine ahead of time whether the portfolio would be a good fit.” The seven platforms that allowed investors to answer questions without registering were Ally Invest, E-Trade Core Portfolios, Fidelity Go, J.P. Morgan Automated Investing, Merrill Edge Guided Investing, Schwab Intelligent Portfolios and SigFig, Morningstar reported. The Latest Recommended Portfolios Differ Significantly Among the recommendations for investor A, Merrill Edge Guided Investing suggested 91% in equities, 8% in fixed income and 1% in cash, while E-Trade Core Portfolios advised 44% in equities and 56% in fixed income. Schwab Intelligent Portfolios recommended 49% in equities, 38% in fixed income and 12% in cash. Recommendations for investor B also varied widely. SigFig advised the client to invest 87% in equities and 13% in fixed income, while E-Trade recommended 44% in equities and 56% in fixed income, for example. Subasset allocations also differed broadly, according to Arnott. Most providers recommended ETFs focused on U.S. large-cap stocks, international developed markets and emerging markets, while Ally and E-Trade also included small- and mid-cap ETFs, Morningstar reported. Different Profiles Received Some Identical Suggestions One finding from Morningstar’s research was especially surprising, Arnott wrote. “Four of the seven robo-advisors — Ally Invest, E-Trade Core Portfolios, Fidelity Go, and Merrill Edge Guided Investing — recommended the exact same portfolio for both investor profiles,” she said. “This doesn’t really make sense.” The investors’ time horizons, Arnott noted, differed by 18 years, and the one saving for retirement in 25 years probably could and maybe should take on more equity risk, she said. Arnott speculated that those robo-advisors placed more importance on investor risk tolerance than on time horizon. That approach might keep clients invested in market downturns but may not be the best way for a client to save for a certain goal, Arnott added. Robo-Advisor Questions Differed Digital advisors generally ask clients questions to ascertain their goals, risk tolerance and timelines, then enter the information into software programs that use algorithms to deliver portfolio options, she noted. The number of questions each firm asked varied, ranging from six from Ally Invest, Fidelity Go and SigFig to 12 from Schwab Intelligent Portfolios, with SigFig using a streamlined fill-in-the-blank questionnaire, according to Morningstar. E-Trade Core Portfolios asked many questions on investors’ feelings about major market volatility, while time horizon appeared to play a big role for J.P. Morgan Automated Investing in forming suggested portfolios, according to the firm. Investors Should Do Their Homework “The upshot is that while robo-investing delivers on its promise to automate the investment process, investors should still do their own research and make sure they’re comfortable with the recommended portfolio before signing up with a specific provider,” Arnott concluded. NOT FOR REPRINT © 2023 ALM Global, LLC, All Rights Reserved.Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.