For all the talk about the advantages of automated investment platforms, when market volatility spikes, even the most “techy” robo-advisors turn to humans for help.
Like all other investors, robo-advisors’ clients don’t live under rocks. They’ve seen the signals of a slowing global economy, the plunge in oil prices, and the uncertainty about interest rates coming from the Federal Reserve. They’ve also watched the downright scary market volatility that has ensued – like the nearly 9 percent year-to-date drop in the S&P 500 Index.
Just like other investors, robo-advisors’ clients get nervous in times of high volatility. That anxiety drives many of them to think about “getting out” – moving their money to safer havens. The problem is that such moves can hobble investors’ efforts and long-term results.
That’s an outcome robo-advisors obviously want to avoid, and it’s why many of them are enlisting humans to help calm their clients’ nerves and encourage them to stick with their long-term investment strategies.
As reported in Financial Advisor IQ, Charles Schwab’s automated investment platform, Schwab Intelligent Portfolios, experienced a more than 30 percent increase in client calls since December. Schwab’s human advisors, working in call centers and conducting live chats, are handling the flood of inquiries. Thus far, the human element is working well, as less than one percent of Schwab’s robo-clients have changed their risk profiles or asset allocations in the first three weeks of the year.
The Financial Advisor IQ article also cited a less-automated, more human touch being used by tech-centric Betterment to fight off investor panic. According to Daniel Eagan, Betterment’s director of behavioral finance and investing, the firm has been using “very personal, very positive” notifications to communicate with its clients.
Stay Long or Time the Market?
For robo-advisor clients, the recent volatility has brought them face-to-face with the age-old question for investors: Should they adopt a more passive approach, and buy and hold positions for the long term (three to five years or longer)? Or do they go the more active route, and try to always buy low and sell high? The choices, and the arguments for and against each option, are expertly laid out in the excellent Investopedia article entitled Buy-And-Hold Investing Vs. Market Timing.
Ric Edelman, founder of Edelman Financial, a Top 10 RIA with over $15 billion in AUM and more than 30,000 investors, gave his answer to this question in a blog post: “For years I’ve been telling you that the buy-and-hold strategy always beats market timing. For years I’ve been telling you that you’re doomed to failure if you try to engage in ‘market timing,’ a strategy where you try to buy stocks before they rise and try to sell them before they fall. For years, I’ve said that buy-and-hold always beats market timing.”
Then with tongue in cheek, Mr. Edelman adds, “I’m wrong.” He cites a study published in the Financial Analysts Journal that compared the results of buy-and-hold strategies with market timing using data from 1926 through 1999. That study showed that the buy-and-hold strategy only beat the market timing approach 99.8 percent of the time. In 0.02 percent of cases, market timing won out, just barely contradicting Mr. Edelman’s earlier assertion that buy and hold “always” wins. In other words, market timing worked for just two out of 1,000 people who tried it. Those are tough odds.
In a recent blog post, James Swanson, chief investment strategist for MFS, also notes the pros and cons of active versus passive investing and the problem of how near-term concerns often trigger emotional reactions in investors. Those emotions often lead investors to consider actions that aren’t aligned with their long-term investment objectives. Mr. Swanson puts forth a strategy for addressing the issue that involves a largely passive approach, with the occasional addition of a bit of active management:
“So how might we better align investor actions with their long-term intentions? Perhaps by recognizing that investors will only change their behavior if their investment strategies are managed in a way that addresses near-term concerns but maintains a long-term focus.
“If volatility and investors’ emotions were removed completely from the investment process, it is clear that passive, long-term (20 years or more) investing without any attempts to time the market would be the superior choice,” adds Mr. Swanson. “In reality, however…a portfolio can be cultivated without compromising its passive nature. Occasionally taking active steps to capitalize on obvious market updrafts or down drafts can improve returns.”
Given that robo-advisors are all adherents to the passive approach, and that convincing data and studies show that the buy-and-hold approach beats market timing, robo-advisors should continue to be successful. If it takes humans working for these (mostly) automated shops to help strengthen their clients’ resolve and not give in to knee-jerk impulses to sell, then those human advisors will be doing both the robo-advisor firms and their investors a great service.