Are Robo Advisors the Best Way Around Financial Downturns?

With the several largest point drop days in Dow Jones history during March, and with experts still expecting a second Coronavirus wave, we’re looking at putting on our seatbelts to weather the probable storm.

So, what about Robo advisors? They were all the rave when times were good, but how are they going to fair in a downturn? After all, you can never really be tested in a bull market. Sure, you may yield higher or lower than market returns, but the acid test comes with how well you keep afloat during a crisis.

How Roboadvisors perform during a crash

The fact of the matter is, automated investing has never been so popular. And I don’t mean generally, but actually since the market crashed in 2020. In fact, well over twice as many people are signing up during this last crash compared to the same time last year.

WealthBar reported a 23% rise in new deposits, and stated the number of clients who continuously added money to their accounts had fallen by a mere 3%. This is extraordinary in the face of the fastest historical crash. 

Canadian broker Questrade’s Questwealth and WealthSimple Trade also received such a surge in new clients that they had trouble keeping up with all the opening accounts. 

It’s as if the volatility has driven people to a platform that will take the responsibility from their shoulders. Perhaps the idea of relying on an algorithm, or AI, is somewhat reassuring given our notorious fallibility when it comes to markets and investing. A well-diversified portfolio couldn’t be more important when ensuring a crash, but it’s easier said than done of course, which might help explain this influx of signups.

Arielle Sobel, senior communicator at Betterment, states that it has seen more dip buying than any other client reaction. Thus, perhaps the thrust of this influx is hunger and appetite for the market, as opposed to a defensive mindset. She claimed some clients were re-tuning their accounts to lower-risk allocations, but “nothing extreme”.

That’s all well and good, but how did they actually perform?

Backend Benchmarking analysts reported that Robo Titan Invest had performed incredibly during this crash. The report stated “This portfolio holds all individual equities and benefited from a tactical trade, buying a short S&P 500 ETF”.

From the 3rd to the end of March, the fund returned 8%. During this time, the S&P 500 collapsed by 13.79%. Not all Robos shorted the market of course, but general performance across the board hasn’t scared away clients.

The March crash arguably still hasn’t been enough of a test – partly because of its absurdly fast recovery. A recovery so strong, that to claim companies are worth the same now as they were at Christmas time is an alarm bell in and of itself. There’s surely no way this can be the case, with lockdown measures still in place, stifled sales and a huge spike in desperation loans.

The universal advantages of Robos

The first, key advantage of Robo advisors is that they are low cost compared to traditional advisors. They’re not necessarily low cost compared to something like a Vanguard Lifestrategy, but they’re low cost compared to some managed funds, and certainly compared to a financial advisor. 

Many experienced investors believe that the key to investing is keeping costs down. This is even more important during the Coronavirus turbulences, because investments are likely going to drop, particularly the income, and you’ll wish you had minimized costs.

The second advantage, which is arguably the largest for some, is that they’re profoundly accessible. Most have at least a highly functional website, if not an easy-to-use mobile app. You can set up direct debits easily, have specific college-saving plans and even tax harvesting features.

Of course, the automaticity of the platforms is another huge benefit. Instead of having to execute trades yourself, these platforms are running on algorithms that are trading instantaneously. 

The versatility offered means that you can achieve great diversification. In some sense, they may understand your needs better than you do, if you’re a beginner. For example, they may ask a series of questions about your goals, and are able to calculate a risk profile and suitable portfolio. This isn’t always that achievable for some people, who may make emotional decisions subconsciously that don’t match their objective goals.
Of course, they’re not for everyone, and a financial planner would certainly be more accurate in assessing your bespoke situation. If you’re looking for a very specific portfolio or if you have a large pool of money, then it might be worth paying the human experts as many will outperform the algorithms still (for now, before they take over!)