I recently decided to start using a robo advisor for some of my taxable investments. I decided to do a quantitative comparison between them in order to choose one.
Summary:1. I backtested asset allocations of Betterment, Wealthfront, and Wisebanyan portfolios at asset allocations of 90% and 50% stocks, from 2003-2017.
2. They all perform roughly the same as a Vanguard 3-fund portfolio matching their asset allocation.
3. The difference in performance may not be worth the 0.25% management fees charged by Betterment.
4. Despite this, tax loss harvesting and ease of use may warrant using one of these advisors.
The Numbers: 2003-2017 Average Annual Returns: Betterment 90% Stocks: 9.40%
Wealthfront 90% Stocks: 9.52%
Wisebanyan 90% Stocks: 9.31%
Vanguard 3-fund 90% Stocks: 9.11%
Betterment 50% Stocks: 7.50%
Wealthfront 50% Stocks: 7.38%
Wisebanyan 50% Stocks: 7.66%
Vanguard 3-fund 50% Stocks: 7.25%
St. Dev:Betterment 90% Stocks: 14.42%
Wealthfront 90% Stocks: 13.90%
Wisebanyan 90% Stocks: 13.67%
Vanguard 3-fund 90% Stocks: 13.07%
Betterment 50% Stocks: 8.41%
Wealthfront 50% Stocks: 7.62%
Wisebanyan 50% Stocks: 8.43%
Vanguard 3-fund 50% Stocks: 7.34%
Notes and Thoughts: In both the 90% and 50% stock categories, the portfolio with the highest returns also had the highest deviation: more risk more reward. Simple Vanguard 3-fund portfolios were beaten by each robo advisor at both 90% and 50% stocks, but the 3-fund portfolios had lower deviations. Since the robo advisors overweight more volatile categories (e.g. high yield bonds, emerging markets, small caps), they are really more like 93% or 53% Vanguard 3-fund portfolios, in terms of betas. All in all, I’m not buying their crap about how owning 10 ETFs is superior to owning 3. The numbers don’t lie.
But that doesn’t mean I’m choosing to avoid robo advisors. Compared with Vanguard, they offer superior liquidity, the ability to easily set and manage multiple different asset allocations and goals, fractional shares. This is extremely helpful if you want to set short and mid-term goals like saving up for a car, house, wedding, etc. You can do so without manually rebalancing frequently and recalculating your overall asset allocation. It’s also easier to get money in and out of robo advisors compared with Vanguard, so I put part of my safety net to work in a 60% bonds account.
So, which robo advisor did I choose? Wisebanyan. Betterment’s 0.25% advisory fee is simply not worth it in my opinion. Wisebanyan does it for free and gives you basically the same thing. Tax loss harvesting doesn’t really apply to me because I own some of these funds in my Vanguard account so harvesting might inadvertently cause a wash sale. Regarding Wealthfront, I just fundamentally dislike the fact that they include a natural resources ETF in their portfolio. I don’t get it and I don’t like it. I’ve read their reasoning and I completely disagree—why not invest in some other low correlation asset class that is less cyclical and volatile, such as Utilities? I actually had to exclude it from my backtest because it was unavailable on the website I used. Instead, I allocated this percentage to total US stocks. They also charge 0.25% on assets over $15,000, while Wisebanyan is completely free.
If you are considering a robo advisor and you end up picking Wisebanyan, please use my referral link and we will both receive $20 for free.
https://wisebanyan.com/r/OTWx9mUnZ