The next generation of robo-advisors is here. And according to one analyst, their use of active strategies and alternative asset classes could herald a change that ultimately ratchets up the competition with traditional financial advisors.
In a recent report, Celent analyst Will Trout categorizes this new breed of automated investment advisors as “Robo 3.0.” This group includes such companies as Hedgeable, Huygens Capital and Polly Portfolio that combine low-cost, passive exchange-traded funds with more sophisticated automated offerings that, depending on the platform, can include hardcore alternatives or directional bets against the market.
Trout says these companies differ from the first generation of algorithm-based automated portfolio platforms offered by fintech start-ups such as Wealthfront and Betterment, which build portfolios composed mainly of low-cost, index-tracking ETFs diversified across traditional asset classes. And they differ from the second wave of digital wealth management offerings from integrated asset managers including Vanguard and Charles Schwab, which similarly rely on passive, index-based funds but have leveraged their existing market clout to garner far more assets—especially Vanguard—than first-generation competitors.
While these robos might come in slightly different flavors with the types of funds they use and how they use them, Trout believes most retail investors don’t notice the distinctions.
“These offerings [Robo 3.0] are more complex, and should appeal to more sophisticated and affluent investors,” he says. “When robos get to the level of customization seen in managed accounts, which I define as the ability to customize at the securities level, they’re essentially offering a managed account without an advisor’s involvement.”
Huygens Capital is a tactical, risk-focused advisor offering investment strategies that shift between offensive and defensive portfolios as determined by its proprietary system, which incorporates behavioral finance and equity market dynamics.
The company executes its system daily to determine whether to reposition a portfolio the next market day in an effort to avoid periods with high risk of equity market losses. Huygens uses passive equity and fixed-income ETFs in its portfolios, requires a $20,000 minimum and charges 1.25%.
Polly Portfolio employs an actively managed ETF-based platform for its managed accounts. It looks at 14 global financial markets across equity, credit, interest rate and currency markets, and portfolios can either track the company’s economic models or reflect an investor’s own economic or market outlook. Either way, portfolios are adjusted roughly monthly by Polly Portfolio to account for market and economic news.
The company charges a wrap fee of 0.35% to 0.55%, and the investment minimum is $50,000.
Hedgeable, which has roughly $50 million in assets, is by far the largest of the Robo 3.0ers (though that’s just a fraction of the assets held by the bigger 1.0 and 2.0 companies). It also provides the most diverse range of assets—from conventional ETFs, mutual funds and individual securities to Bitcoins, MLPs and venture capital.