Robo Portfolios Vary Widely for Same Client Profile: Morningstar

Recommended Portfolios Differ Significantly

Among the recommendations for investor A, Merrill Edge Guided Investing suggested 91% in equities, 8% in fixed income and 1% in cash, while E-Trade Core Portfolios advised 44% in equities and 56% in fixed income. Schwab Intelligent Portfolios recommended 49% in equities, 38% in fixed income and 12% in cash.

Recommendations for investor B also varied widely. SigFig advised the client to invest 87% in equities and 13% in fixed income, while E-Trade recommended 44% in equities and 56% in fixed income, for example.

Subasset allocations also differed broadly, according to Arnott.

Most providers recommended ETFs focused on U.S. large-cap stocks, international developed markets and emerging markets, while Ally and E-Trade also included small- and mid-cap ETFs, Morningstar reported.

Different Profiles Received Some Identical Suggestions

One finding from Morningstar’s research was especially surprising, Arnott wrote. “Four of the seven robo-advisors — Ally Invest, E-Trade Core Portfolios, Fidelity Go, and Merrill Edge Guided Investing — recommended the exact same portfolio for both investor profiles,” she said. “This doesn’t really make sense.”

The investors’ time horizons, Arnott noted, differed by 18 years, and the one saving for retirement in 25 years probably could and maybe should take on more equity risk, she said. Arnott speculated that those robo-advisors placed more importance on investor risk tolerance than on time horizon.

That approach might keep clients invested in market downturns but may not be the best way for a client to save for a certain goal, Arnott added.

Robo-Advisor Questions Differed

Digital advisors generally ask clients questions to ascertain their goals, risk tolerance and timelines, then enter the information into software programs that use algorithms to deliver portfolio options, she noted.

The number of questions each firm asked varied, ranging from six from Ally Invest, Fidelity Go and SigFig to 12 from Schwab Intelligent Portfolios, with SigFig using a streamlined fill-in-the-blank questionnaire, according to Morningstar.

E-Trade Core Portfolios asked many questions on investors’ feelings about major market volatility, while time horizon appeared to play a big role for J.P. Morgan Automated Investing in forming suggested portfolios, according to the firm.

Investors Should Do Their Homework

“The upshot is that while robo-investing delivers on its promise to automate the investment process, investors should still do their own research and make sure they’re comfortable with the recommended portfolio before signing up with a specific provider,” Arnott concluded.