As market volatility returned during the first quarter, robo-advisors also endured a bumpy ride.
Amid the volatility, robo-advisors with more active portfolios performed better in the first quarter of 2018, according to the most recent edition of “The Robo Report” by Martinsville, N.J.-based Backend Benchmarking.
For two years, the firm has tracked the performance of robo-advisors by opening up two separate accounts with them, one a taxable account using a balanced 60/40 portfolio, the other an aggressive tax-deferred IRA account.
For example, T. Rowe Price currently offers robo-advisory services in IRA accounts using proprietary actively managed funds. Its portfolio led all IRA robo-advisors for the first quarter, producing a 0.77 percent return. Similarly, robo-advisors from United Income, at 0.39 percent, and Wells Fargo, at negative 0.35 percent, were able to produce some of the most attractive returns for the quarter, largely benefiting from the influence of actively managed funds.
During the first quarter, all 28 taxable robo-advisor portfolios studied in the report produced negative returns, with most roughly in line with the S&P 500’s 0.76 percent loss. Robo-advisors SigFig and SoFi were among the best performers, as portfolios with a higher allocation to emerging markets and small-cap stocks tended to fare better.
The best taxable robo-advisor performers in the first quarter for total portfolios were SoFi, which posted a loss of 0.14 percent; Schwab, which returned a negative 0.33 percent; and TIAA’s socially responsible portfolios, which posted a 0.45 percent loss.
The top-performing taxable robo-advisors for total portfolios over the two-year duration of Backend Benchmarking’s study are Schwab, offering 10.98 percent annualized two-year returns; SigFig, which returned an average of 10.71 percent annually over two years; and Betterment, which returned 10.24 percent.
According to the report, portfolios from robo-advisor Personal Capital tended to underperform because of their sector allocations to energy, consumer staples, telecommunications and real estate, while Betterment’s portfolios suffered most likely for their value tilt.
As the U.S. stock market plummeted during the day on February 5, two of the largest robo-advisors, Wealthfront and Betterment, experienced website outages that prevented clients from logging in or making changes to their accounts. The report notes that major financial firms like Fidelity, Vanguard, T. Rowe Price, Schwab and TD Ameritrade also suffered problems with website response times or accessibility as the Dow Jones Industrial Average dropped as much as 1,500 points.
Financial firms may be getting some competition in the robo-advisor business, according to the report, which acknowledges Overstock.com’s entry into the space and mentions that Amazon, Google and others might also enter the investment advice industry. In Amazon’s case, the authors believe that an entry into the banking industry might be more likely.