Loring Ward Releases White Paper on Robo-Advisor Marketplace

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Finds portfolios may be constructed inefficiently and expose investors to unnecessary risks.

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Robo-advisors might build inexpensive portfolios, but unfortunately they are not delivering anything close to optimal portfolios.

Loring Ward today released a special white paper on "Robo-Advisors: Looking Beyond the Low-Cost Service," which compares moderate portfolios built by the top five robo-advisors (Vanguard, Schwab, WealthFront, Betterment and Personal Capital) to a benchmark portfolio with several decades of measurable performance.

Based on extensive research by Loring Ward’s Portfolio Strategy and Research Group, the white paper looks at the key characteristics of the robo-advisors’ portfolios, such as asset allocation, diversification, stock and bond risk, investment costs and overall portfolio risk and efficiency.

Though the robo-advisor portfolios are generally well diversified, the white paper identifies several gaps in certain other important investment characteristics of these portfolios, including:

  • Large exposures to emerging markets, significantly increasing portfolio risk
  • Lack of small-cap and value tilts that lower potential returns
  • Exposure to junk bonds
  • Significant variations in asset allocation weights across robo-advisor firms for a given client profile, particularly with respect to large allocations to either stocks or to cash

As Sheldon McFarland, VP with Loring Ward and one of the authors of this white paper, notes, “Robo-advisors might build inexpensive portfolios, but unfortunately they are not delivering anything close to optimal portfolios. This could have a real impact on long-term investors attempting to invest for a critical life goal, such as retirement.”

One of the major findings of the white paper is that the robo-advisor’s asset allocations tend to reduce the overall efficiency of their portfolios. This means investors in these portfolios might not be getting the optimum returns possible for their chosen levels of risk and may even be exposed to risks they may not fully understand.

According to Loring Ward’s Chief Investment Officer, Payel Farasat, “This whitepaper shares some of the dangers of letting a computer, rather than a human advisor, determine the course of a client’s investing lifetime. This is such an important topic to our industry that we plan to further investigate whether robo-advisors are able to extract in the real world the well-known premiums that arise naturally from known behavioral finance concepts and anomalies.”

Click here to view the whitepaper: "Robo-Advisors: Looking Beyond the Low-Cost Service."

About Loring Ward
Loring Ward (LWI Financial Inc.) is committed to creating a better wealth experience for Financial Advisors and their clients across the U.S. For over 25 years, the firm has strived to do this by empowering Advisors with Investment and Advisor Solutions that increase the probability of delivering a great experience for their clients.

We have one of the largest networks of independent Advisors in the United States and are located in Silicon Valley, California.

Loring Ward’s Asset Class Investing philosophy is based on almost nine decades of data, analysis and research, insights from behavioral finance, and close relationships with leading academics, including Loring Ward Investment Committee Members Dr. Meir Statman and Nobel Laureate, Dr. Harry Markowitz.

As of December 2016, Loring Ward has $13.9 billion in assets under management. For more information, please visit http://www.loringward.com.

LWI Financial Inc. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission. Securities transactions are offered through its affiliate, Loring Ward Securities Inc., member FINRA/SIPC. R16-260 (10/18).

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William Chettle
Loring Ward
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