Transcript
Paul Winkler: And welcome to The Investor Coaching Show. Paul Winkler here. Well, I don’t know where we are.
Robo-Investing
There is a lot of stuff that we’ll be covering today. There was an article and one of my financial advisor friends commented on, and I wasn’t exactly sure where he was going, but I couldn’t quite figure it out. So I started looking around for some information on this, but it was Goldman Sachs, a big investment firm, is joining the robo investing party, should you? And this is something that we’re seeing a lot more of robotic investment portfolios.
I thought I’d cover some of this, you know, as I’ve talked about it a little bit before, but I thought there were some interesting things in this particular article in MarketWatch that I would share with the audience. So a robotic investment portfolio. So we have robots choosing investment portfolios based on, you know, they’ll have algorithms and it’s all computerized trading and you know, a lot of people don’t really, you know, I don’t, I don’t see this a whole lot. The investing world is embracing it to some extent for investment advisors. And I thought I’d just talk a little bit about that because there’s so much that people don’t know about robotic portfolios and the way I like to put this as just make it a little bit more understandable.
Chad Henson: I haven’t reviewed any portfolios, but I’ve done some research on some of the robo platforms and it’s, it’s interesting what you’ll see the way that they’re invested, the way that they work, but I haven’t encountered anyone specifically that happened to have any of them. So the one thing that always jumps out to me is how much cash they hold on hand.
Paul Winkler: Ah, no, that’s, I’m glad you brought that up because that’s a big part of it. And it explained what the issue is there. You know, the issueis that, let’s say you put a hundred dollars into a robo trading platform. And the one that I did some research on had a 6% cash holding on it. So only $94 of your, of your money’s getting invested. 6% of it, $6 is sitting in cash and they’re paying you maybe 0.01%, but yet they’ve got it invested in there. That’s, you know, the, the, the whole object of robo investing is that it’s a cheaper way to go, but as everybody knows, nobody does anything, and they’re making money on the spread.
And you know, that would be a low one. I’ve seen it even higher than that, where they hold even more than that, or they find ways to make money on the spread someplace else. So that’s, that’s one of the things, you know, that they will bring somebody in through low visible expenses, but they have a lot of other expenses that you don’t necessarily see. And that’s one of them is that hidden costs on what they’re making on spreads. Or the other thing is that they may be using a lot of their own portfolios, their own funds and things like that. So, that’s one way they do that. Now this has become a big deal out there in the investing world. And, you know, they had this new robo advisory service in this particular article, talking about if you have at least a thousand dollars, you can invest and you use the same trading algorithms that have been used by some of the wealthiest clients at Goldman Sachs.
Perspective on Wealth and Success
Now here’s something I like to point out, not necessarily, I want to point out or pick on Goldman Sachs or anything like that in particular. And I will in a little bit, talk a little bit more about that and why I will pick on it a little bit. But really what it gets down to is if we look at wealthy investors and you may have heard me say this before, if you look at their track record with managing money, it is not nearly what you think it is. Now. People will often look to wealthy people and say, Hey, you know, these people are wealthy. I ought to be following what they’re following. And I totally agree with that when it comes to, let’s say, being in business, you, if I look at it at a business person that is wealthy, I’m gonna want a copy of what they’re doing.
You know, because typically they got there because of lessons learned. And it’s a good idea to follow somebody that’s having success, because you might pick up something along the way. And that’s because the past performance is indicative of future performance. You know, when I look at somebody in business and go, wow, this person really seems to know what they’re doing.
There’s a story, just so anybody that doesn’t know Chad’s story, you know, he used to listen to the show all the time and you just got in contact with me. And I know it was one of these guys that came in and said, I don’t want to learn off of you and just picked up and went and got first financial planning degree, a certified financial planner, which is a really high bar to get over and then went and got, you know, the second one, which is the chartered retirement planning counselor.
Chad Henson: Which became chartered special needs consultant.
Paul Winkler: So those of you that may have situations where you have, let’s say kids that are, you know, that they have challenges, disability challenges, and you’re worried, well, you know, if something happens to me, nobody’s there to take care of, you know, Johnny or Susie and, and who will take care of them. That’s what Chad does now around here. So it’s, it’s near and dear to his heart talking about this whole thing about studying and getting advice and counsel from somebody that has experience. And this is something I always tell people that if you’re younger and you want to become a financial planner, this is something that you do. Yeah. You know, you can go in and work for a big investment firm or a bank.
And that’s typically what happens is they’ll go to work for a bank. It’s like Jonathan, that’s where he came from working for a couple of the biggest banks in town and got some decent experience in all of that. But it was more sales. It was just selling stuff. Well, so then Napoleon Hill goes and does this, and he ends up working for this guy. This guy goes, you’ll start at a normal salary. You know, I’m not going to the Bay. The attorney didn’t take advantage of him. He didn’t say, you know, you’ll pay me or anything like that. He ended up bringing them in. So the whole point here is that, you know, if you look at wealthy people, that’s where their value really is. Their value is not in great investing prowess because as Forbes fortune 400, there was a book that was called all the money in the world, pointed out there.
The investment returns of the wealthy people is nothing to brag about really when it gets down to it. So, number one, if you hear this kind of thing, don’t get overly excited that they’re opening up their algorithm that they’re using for the wealthiest clients. You know, because hedge funds are notoriously bad at managing money. You only hear about them when they do well. Okay. Now one, one person interviewed for the article said, it’s much like Vegas. In Vegas, the house generally wins. You know, they’re not losing money. So what they’ll do is they will cross sell, you know, so you’ll bring you in cheap management fee and then they cross sell banking products, you know, so they’ll have something else that they want to bring you in.
Kind of like Chad says, you know, they might have their investments and they’ll have their fixed income accounts and make a pretty big spread on that. And they said, the company is among many major investment firms offering digital advisors like fidelity Schwab and Vanguard. And, you know, here’s the thing about these things. Now, I know that, you know, you’ve seen a lot of this stuff. It reminds me of target date funds. I, you know, people say that robotic portfolios are brand new.
Chad Henson: No, no, they’ve been around. It’s just now it’s being marketed in different ways, where it’s easily accessible to anyone and everyone.
Paul Winkler: Yeah. And, and target date portfolios have been robotic portfolios for a long, long time. And you know what, we’ll see that there are vast differences, you know, between them. One put out by one company versus another versus another and there are vast differences.
Chad Henson: Definitely. Yeah. Yeah. You’ll see that a lot. And when we, when we look at them and break them down, you would think, Oh, I’m going to retire in 2040. But the difference between the producers, the, you know, whether it be fidelity or Vanguard or anyone else, they can be drastically different and their allocations and the management style too.
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Investment Management
Paul Winkler: Yes. It was like, we were talking, you know, a little bit earlier, we were talking a little bit about amongst ourselves. And we were just saying, you know, it’s, it’s interesting. Cause one fund company could be really, really actively buying and selling and adding different commodities and those types of things. And that’s what they found with these robot robotic portfolios as well, has that there are vast differences between them. And matter of fact, a friend of mine actually went and seeded several different robotic portfolios with his own money. I was like, you know, it’s just like, I couldn’t do that. But you know, I’m glad you’re doing it so you can tell me how they work. And he did he, and what was really interesting about this, Chad is he actually called up the portfolio.
He set up the portfolio and I kid you not a day later, he said, you know, I’m kinda nervous. Can we just take everything out of stocks and put it into cash? And they were like, sure, well, and yeah, they, they basically let him self-destruct all on his own. So it shows that their level of commitment to the client may sometimes be lacking. You know? So they said in market watch, this is a one common misconception about automated investing. Is that choosing a robo-advisor essentially means handing control over your money to robots. The truth is that robo solutions have a combination of automated and human components, running things behind the scenes.
And that, that is in essence, what’s going on. So you really don’t know what they’re doing. You don’t know anything about diversity. You don’t know anything about their investment philosophy. That would take a tremendous amount of faith to me, just to hand over my money and just say, here you guys do what you think is best. Not knowing what their incentives to, you know, how they’re going to make money. You know, what may be conflicts that they have behind the scenes,
Chad Henson: Right? It’s to me, it’s kinda like just a, you know, your car’s running fine and you pull into the dealership and just, they say, well, what do you need? What’s wrong? And you say, well, you know, really nothing’s wrong, but just take it in and do whatever it needs done to
Paul Winkler: That’d be scary, you know? So that they found that the robo investing tends to appeal to inexperienced investors is what they, and you can see where that would be. But then, they said, others disagree. They say, no, it actually, it feels to older investors as well. Now it says, you’re now here’s one of the, one of the keys. And I think that Chad, you relate to this. So your robo advisor only knows what you tell them. Simplistic questionnaire you’re acquired to fill out will only, they’ll just collect information on, you know, like in annual income when you’re going to retire at a level of risk that you’re willing to take on now, right off the bat. I want to hear what you have to say, the level of risk that you’re willing to take on.
What’s the issue with that?
Chad Henson: Oh, the issue with that is if, if you know, the recent past is, has done well, the market’s done really well. You’re exuberant. You’re ready to go. Do you? And it’s just, just all in. I’m ready to go. But you know, on the other hand, if, you know, if you were starting a robo account at the end of February last year.
Paul Winkler: Oh yeah, yeah. I have had absolutely zero risk tolerance at the end of the year. Right.
Investing Is Emotional
Chad Henson: I just want something safe. I don’t want to lose any money. So I mean, your risk tolerance changes based on your emotions.
Paul Winkler: It is. It’s so emotional. And I know it’s funny because I’ve been doing this 30 years and I find myself in the same boat. I find that I am subject to the same exact stuff. And you know, for me, it reminds me of that conversation that I had with Jonathan one day where he was talking to a client and he’s making, he’s telling the client, here’s what we’re going to do. Here’s the, here’s the change we’re going to make in your portfolio. And it was a funny, funny conversation because he said, yeah, here’s I’m and the client goes, ah, how do you do that? I don’t know how you do this because it was, I think it was like a market. The market was down and things. Weren’t looking so great. And he says, we’re going to go and put it in.
We’re going to put these in these stocks and these areas in the market and stock asset classes. And John, Jonathan just goes to the client. Well, how do we do it? Well, it’s easy. It’s not my money. I about had a heart attack walking by his door when he said that to the clients, these it’s not my money, but he was making a point that the client needed to hear. And it is so hard to properly manage your own money because when the market’s not doing well, the last thing that you want to do is buy stocks when the market is doing well. The last thing that you want to do is hold more bonds or fixed income.
And that is why it’s so critical. Having somebody outside of yourself, that’s not emotionally involved in the management of the money. And you know, I’m telling you, it’s one of those things that I, you know, and I’ve done this for so many years. And I still, when I know I’ve got to write a check and, and I, I still, I, in the back of my mind, how will I still look? I still look at them at what the market’s doing. And I had one of my employees one day, I was actually doing this sending in a, I wanted to send in money for my non-qualified account, my investment account. And I will never forget going and saying, Hey, can we get this in?
I want to watch, I want to wire it in because the market was down. And I was just the opposite. The market was down. I wanted to invest. Right, right. And she goes, Paul Winkler, you are not going to do that on my watch. And I laughed and I go, Oh girl, you are right. I shouldn’t be doing this. I said, okay, send a check-in like we always do when I send money in. And the funny thing was, she sent a check in to my account from me, obviously sent a check-in and the check went in two, three days later or something like that. The funny thing was the market continued to go down for the next two or three days. And then when the money was physically deposited, it was the market low.
Chad Henson: That’s good too.
Paul Winkler: Yeah, exactly. Which was not on purpose, but it was a good time. No, it was perfect timing, but absolutely not on purpose. And it just shows, I mean, it’s a good illustration of how this, how this works and how difficult it is.
Chad Henson: I think it’s natural just to, you know, you’re going to look at it when you’re, when you’re putting money in, because it’s just a, it’s an emotional decision. And you know, your, your point about having someone outside is so good because, you know, it’s, you’re getting advice from someone that’s not emotionally attached to your money. It’s not that we’re not emotionally attached to our clients, but we base our investing philosophy on academics,
Paul Winkler: So it’s not like, Oh, I can’t, you know, but it’s hard when it’s your own money. It really is. It’s a point that’s really worth looking at and thinking about now, the other thing that they talk about in the article before we had to break here, as I think the other thing that is really important is that they don’t manage money based on tax efficiency. They don’t keep it in mind. As they said in this article, they said, we’re not keeping tax efficiency. We’re not thinking about that. This is with robo investing. The trades that are made for you are the same ones that are being made for a slew of other investors who may fall under totally different tax, have a totally different sec tax situation than you.
So I think that’s a really good point to be made right there. Now target date funds. I’ve said that I’ve never been a big fan of target date funds because of how diverse they are in the way they manage it. You could have the same exact retirement date, but they manage in totally different manners. So you look at that and go, well, there can’t be unlimited different options on the best way to manage money for somebody retiring in 2035. And it just doesn’t make sense, but that’s what you actually see. So you really don’t know what you’re getting and same thing with robo-advisors finally. And that’s what I want to point out. The article says, but not everyone can tell the difference between robo advice and advice from a human being in 2015, MarketWatch asked four prominent robo-advisors and four of the traditional key traditional flesh and blood variety to construct portfolios for a hypothetical 35-year-old investor with $40,000 to invest.
The Difference Between Humans and Robots
Now, here’s the point made, the results were perhaps surprising for critics of robo-advisors: robots’ suggestions were not massively different from what human advisors I proposed said. Michael gets us pinnacle advisory groups, research director, after reviewing the results point to be made here. I have, you’ve heard, let me say this over and over again. The studies on our memory and the very first study that Dalbar had ever done Dalbar research out of Boston, they actually broke investor returns between do it yourself, investors, no load funds. And people advised by investment advisors.
They looked at load funds. And the funny thing was when the first time that this study was ever done, I saw this in the late nineties, the first time I ever saw the study and they found that there was like a 2% difference. It was something like a 0.2% difference in return. Now the advisors got slightly higher returns now after expenses. Now here’s the thing to keep in mind what happened here. They got slightly higher returns and they made some pretty, and this and their returns were, or were significantly below the market. Let me add that the returns were significantly below market returns over that period of time. Yeah. In other words, the advisors, the clients made the same exact mistakes as each other.
If we’re seeing here that they’re not seeing any difference between human advisors and advisors, that tells me that robots are making the same mistakes that humans are as the way I would look at that. And we do, we see it. I’ve talked about it time and time again with these target date funds their mixes are way too heavily weighted in US companies way too heavily weighted in growth companies, way too heavily weighted in larger companies. Why? Because remember the robotic portfolios, there’s not any kind of coach there. There’s no coaching going on.
There’s no guidance. There’s no knowing the investor intimately. And therefore what ends up happening is you end up with a portfolio that is weighted in such a way that would appeal to the unsophisticated investor that is typically looking at the market and going to the market to them is the Dow and the S&P 500 diversification is something that we have seen time and time again in, and this has been talked about in the industry. The reason that the investment world does not grab onto the academic research in multifactor models and multifactor investing, which is driving an investor, make sure that you own very, very dissimilar periods are actions of the market like large, very large companies versus very small and very value-oriented versus very growth because cause investors typically don’t remain disciplined.
And here’s the issue. If there is just a robot managing the portfolio and you have the ability to make changes, anytime you feel like making changes and you call up, like my friend did and say, I’m nervous. Can we pull out of the market? Sure. They will let you self-destruct whenever you want to. And that is a problem in my humble opinion, with this type of platform.
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