Q1 2020 – The stock market’s worst quarter since 1987: How Robo Advisors performed and the implications for traditional wealth managers
However, this generalization is not entirely warranted. According to Bloomberg, TD Ameritrade saw new-account openings for its automated investing platform jump 150% between Feb. 19 and March. 30 as compared to the same period a year ago. Wealthfront investment stated that account signups were about 68% higher since stocks declined, while Betterment’s first-quarter account growth was 25% higher than a year ago .
The unexpected enhanced interest in robo investment platforms through the uncertain economic climate, can be attributed to several factors. Customer-friendly industry trends such as management fee compression and low investment account minimums, coupled with sharp swings in security prices, incentivized several investors, including young and first time-traders to step off the sidelines. Moreover, the added convenience factor provided by robo platforms to act as one-stop service mechanisms for an array of services such as cash accounts, financial advisory, lending and retirement services has helped develop traction among millennials and Generation X. The ease of opening accounts with robo advisors, setting up ongoing funding contributions, and instantaneously receiving a personalized investment profile after gauging one’s risk and tolerance goals through a few simple questions, are all factors notably fostering growth in this sector. With the spike in national unemployment and work from home restrictions on all non-essential workers, several individuals have experienced increased freedom, spare time and minimal supervision, which has also contributed to elevated trading volumes experienced by brokerages and automated platforms . Lastly, the growth of ‘Thematic Investing’ and Socially Responsible Investing Portfolio (SRI) offerings by robo advisory programs has stimulated interest in their services. These positive trends are expected to sustainably continue, enabling the robo-advisory industry to grow from $600B to $2T in assets over the next two years .
Upon closely analyzing the investment returns of the prominent robo-advisors in the industry, it is noteworthy that ~30% of the platforms were successful in outperforming the broader market index. The following section aims to highlight the advisors that exceled and discuss the common attributes that help differentiate them from the industry laggards.
 Rockeman, Olivia. Robo Advisors Gain New, Younger Clients Amid Market Turmoil. Bloomberg, 30 Mar. 2020.
 Osipovich, Alexander, and Caitlin McCabe. “Coronavirus Turmoil, Free Trades Draw Newbies Into Stock Market.” The Wall Street Journal, Dow Jones & Company, 29 Apr. 2020.
 McCann, Bailey. “Robo Advisers Keep Adding On Services.” The Wall Street Journal, Dow Jones & Company, 9 Mar. 2020.
The Wealthsimple portfolio’s success is attributed to its underlying asset selection strategy. The fixed income holdings of the portfolio are exclusively investment-grade, with approximately two-thirds allocated to long-duration U.S. Treasury bonds. In terms of equity securities, its international minimum volatility fund holdings had an inverse impact on returns during the market selloff. SigFig, a long-term top performer, has benefited from a higher composition of domestic large cap stocks than its competitors and a larger allocation towards emerging markets in the international arena. SigFig charges low management fees ($0 on an investor’s first $10,000 managed) which also bolstered returns.
On the other hand, Schwab’s underperformance is primarily a result of its high cash allocation and inclination towards value stocks, which have notably lagged their growth stock peers. Axos Invest managed to limit its losses by actively executing rebalancing trades to unload fixed income and build on its equity positions as the market began to plummet. Wells Fargo’s poor returns are a result of its fixed income exposure in high yield and emerging market ETFs, both of which were hit hard as investors fled to quality assets. Although the fixed income assets of the Morgan Stanley portfolio performed well through Q1 2020, its equity positions lost 28.34%. The fund held an ETF allocated to energy holdings which were particularly hard hit due to lagging demand and political issues resulting in oversupply .
 “The Robo Report First Quarter 2020.” Backend Benchmarking, www.backendbenchmarking.com/the-robo-report/
 Coleman, Braiden and Merkley, Kenneth J. and Pacelli, Joseph, Man versus Machine: A Comparison of Robo-Analyst and Traditional Research Analyst Investment Recommendations (February 2020)
- A major downside of robo-advisors during similar market downturns is the lack of personal human interaction to help calm investor nerves and provide effective guidance and counsel. Robo advisors should consider integrating live chat capabilities or video conferencing to human advisors to help bridge the gap and increase the quality and frequency of electronic communication with clients, particularly during market selloffs.
- Provide strategic assessment to client on the state of the robo-advisor market and future industry outlook, including considerations of existing and anticipated regulations
- Comparison of pure online vs. hybrid robo models, players, offerings, investment options, account types and service models
- Determine if a robo-advisor opportunity exists for the client and which segments of its customer base would be suitable to target/serve
- Determine opportunity to acquire new customers with a robo offering
- Assess strategies for integrating robo capabilities with existing personal advisor offerings
- Answer key questions around the role of the robo advisor, integration with existing business lines and advisor models
- Evaluate short-term solution for robo advisor: partner or buy
- Align on short-term and long-term robo and virtual advisory strategy
- Develop initial business case and economic models for both robo and virtual advisory