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I asked three robots how I should invest, got three different answers

Michael Santoli
Michael Santoli
Thinkstock

Before any of the robots agreed to manage my money, they wanted to get acquainted. Once I’d answered a few questions about myself, each of the machines produced a somewhat different formula for investing my savings – even though I represented myself honestly as the same, actual human.

What are these robots, and why can’t they seem to agree?

First, a bit of background: Several automated investment services known as “robo-advisors” have been squaring off this week, with the people who built them tussling over whose software offers the purest, cheapest portfolios for long-term investors.

The entry of retail-investing giant Charles Schwab Corp. (SCHW) into the robo game touched off the tiff, drawing criticism from fast-growing upstarts Wealthfront and Betterment – venture-capital-backed firms that offer nothing but inexpensive, software-directed money management.

Wealthfront CEO Adam Nash pointed out in a pugnacious blog post that Schwab’s offering, pushed as having no management fee, typically includes a significant cash position on which Schwab’s in-house bank will earn an interest spread. And Schwab will use some of its own exchange-traded funds in clients’ asset-allocation mix, on which they collect a slim management fee.

Schwab thrust back at Nash in a blog post of its own, defending its Intelligent Portfolios service and pointing out that if interest rates ever “normalize,” clients will earn interest on the cash allocation.

Meantime, Betterment's director of behavioral finance and investments, Dan Egan, went at Schwab separately, weighing in against the very notion of holding cash in an investment portfolio  quite a rarefied academic argument to have come from a retail product launch. (Betterment has a deal with an arm of Schwab rival Fidelity Investments to help registered investment advisors automate some of their services.)

Wealthfront and Betterment generally charge around 0.25% a year, depending on account size, on top of fees on the third-party ETFs they use, which can run near 0.15% a year.

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The sharp and personal tussle has been refreshingly open and amusing in its way. And it generated a diffuse, smart and lively debate on blogs and Twitter about core investment ideas.

Yet it could also be a case where the intensity of the opposition to Schwab springs from the relative narrowness of the real differences among the services and the need for Wealthfront and Betterment to seem distinct and new.

The big-picture takeaway, though, is that it’s never been easier or less costly for self-directed investors to access broad exposure to financial markets through software that embeds the best research on building wealth over time, rebalancing the mix automatically to stick to the plan.

A personalized recommendation... times 3

Given this similarity in broad approach, I thought it would be instructive to go through the sign-up process for three robo-advisors -- Wealthfront, Betterment and Charles Schwab -- to see what precise array of investments each one deemed ideal for me.


These services are little more than a user interface with a portfolio-monitoring algorithm and fund services on the back end, and they try to keep the new-account creation process clean and quick. A brief questionnaire is the way the “robot” determines how much risk you should take and therefore what mix of assets you should own.

For each I used my true age (44) and where prompted about income, assets or risk appetite I answered honestly in order to present myself to each service as the same profile of investor.

Schwab wanted to know how I feel when I hear the word “risk” in relation to my portfolio: worried, understanding it’s unavoidable, seeing it as opportunity or feeling a “thrill” of investing. Other queries ask about familiarity with investment products and how I’d react to a 20% drop in portfolio value in a year.

Wealthfront was interested in my age, income, value of my current investments, feelings about playing for gains versus avoiding losses and my likely reaction to a hypothetical 10% monthly on-paper loss.

Betterment goes for the most distilled line of inquiry, asking my age and income, my main financial goal (retirement, down payment) and how long until I’ll need the money.

All of them came up with a reasonably aggressive, equity-skewed investment mix befitting someone who’s putting money away for at least 20 years.

Schwab proposed a portfolio with this split: 85% stock funds, 6.9% cash, 5% bond funds and 3.1% commodities in the form of gold or other precious metals. Its equity fund mix was rather busy and eclectic. Schwab teed up 12 different funds for the equity portion alone --  including 3% in U.S. real estate investment trusts and 2% in international REITs -- versus six for Betterment and four for Wealthfront.

In addition to the standard U.S. and international index funds spanning large- and small-cap stocks, Schwab pushes a heavy helping of “fundamental” stock index funds, equal to 24% of the total portfolio.

These are known as “smart beta” strategies, which weight companies based on fundamental factors such as revenues or book value rather than market capitalization. Nash explicitly criticized this approach, about which investment professionals do differ.

Wealthfront placed my risk tolerance at a 7.5 on a scale of 10. That meant a split of 80% equities, 15% bonds and 5% commodities, or natural resources. Its investment selections were by far the simplest and most compact.

For stocks, that meant four Vanguard index funds spanning U.S. and foreign markets; all of the 15% fixed-income slice in iShares National AMT-Free Municipal Bond ETF (MUB); and 5% in the iPath DJ-UBS Commodity index fund (DJP).  

Betterment wanted me to be a bit more aggressive: 90% stocks, and 10% bonds, with none of the bonds in Treasuries and only a sliver of U.S. corporate debt, preferring munis and international bonds.

Asset allocation assymetries


Any investor or analyst could quibble with the composition of these portfolios and the exact asset allocation, and over a long span the variation in returns from, say, 80% equities versus 90% could be significant. There are as many arguments against bothering with commodities as for them, for instance. Is it right that none of the three see much use at all for Treasuries or high-grade corporate bonds now? And fundamental-index funds haven’t been tested over very long time spans yet.

Still, they all get the basics right: Broad exposure to the main asset classes at low cost, with ease of rebalancing and adjustment over time. It’s a very good deal, and younger investors in particular would have a hard time doing any better.

Yet after going through these exercises, it occurred to me that none of the robots know anything close to my whole situation. They never asked about my present employer Vanguard 401(k) account, an IRA rollover from another corporate retirement plan, my wife’s assortment of former-employer stock, whether we own a home or have 529 college-savings accounts or have lots of debt, or whether I have a habit of overpaying for antique maps now and then.

Those are the things that only an investment advisor with a pulse, a business card and a license would ask. And it’s why many people won’t be ready to let the robots run their finances, no matter how smart and friendly they are.