How Are The Bots Doing?

In the past few years several new ETFs using artificial intelligence to guide their securities selection processes have come to market. While most of these funds are still quite young, we thought it might be of interest to see how they’ve performed particularly through the volatility at the close of last year.

San Francisco-based EquBot has arguably the purest AI products with the broadest investment parameters and the most assets. EquBot employs proprietary algorithms and multiple artificial intelligence (AI) cognitive computing platforms to identify mispriced investments in the marketplace, optimize exposure, and then capitalize on the timing of those positions. EquBot’s first product was AI Powered Equity launched in October, 2017. The relative growth of this product is shown in the table below. 

Source: Morningstar, Inc.

AI Powered Equity tracked the Russell 1000 Index relatively closely performing better in up markets but underperforming on the downside. A consistent and substantial relative advantage of AI in this fund still remains to be proven.  EquBot also introduced an international fund in the middle of last year. Its results to date are shown in the chart below. 

Source: Morningstar, Inc.

Tracking closely but slightly underperforming the index, this fund also cannot be considered clear proof of concept. Perhaps most important, neither EquBot fund was immune to the downside volatility late last year. Two other providers have introduced AI ETFs over the last two years.

○ State Street introduced six largely sector specific products subadvised by Kensho Technologies which use ”real-time statistical computing systems and scalable analytics architectures to identify innovative companies positioned for growth.”

○ iShares rolled out seven Evolved U.S. Sector ETFs. These funds build more accurate forward-looking indexes using text analysis guided by machine learning to identify words or phrases company’s use to describe themselves in public materials.

The table below shows the returns of these products compared to best fit indexes assigned by Morningstar. Although results are mixed, in many cases, these funds have significantly outperformed their benchmarks.   

Source: Morningstar, Inc.

Overall, it is still too soon to tell how successful AI will be. These early results show significant promise in many cases, suggesting that AI is more a movement than a fad in investing. 

Do Clients Mind The Gap?

A recent study by Morningstar reveals significant gaps between what advisors think are the top attributes or skills they bring to the relationship and what their clients value most. While both advisors and investors rank “Helps me achieve my financial goals” at or near the top of what investors value, results diverge from there. The attributes that represent the three widest gaps are:

1.     “Can help me maximize my returns”

Achieving significant investment returns is close to the top of the list of what clients expect from advisors. Advisors, on the other hand, put it close to the bottom. This is likely due in large part to the industry’s emphasis in the past on performance as a selling point. It could also be because most advisors consider themselves holistic wealth advisors, where investments are only part of what they deliver.

The message is clear: advisors may need to remind their clients that reaching their financial goals, rather than beating the benchmark, is what it’s all about.

2.     “Helps me stay in control of my emotions”

Investors put this at the bottom of the list. Yet, advisors think it adds value, and a 2014 Vanguard study shows that by acting as a behavioral coach to guide investors through market volatility, an advisor can add, on average, 150 basis points to a client’s return over a five-year period. Helping investors understand the importance of this attribute can go a long way toward reinforcing the tangible value an advisor can bring to the table.

3.     “Understands me and my unique needs”

Advisors think they perform no higher value than really understanding their clients. They put this attribute at the very top of the list. Investors, on the other hand, rank it somewhere in the middle in terms of value. This could again be because investors are focused on investment advice and returns/performance metrics, or because, while advisors often emphasize personalization, they haven’t successfully delivered. This could be costing investors, however, as research (David Blanchett “The Value of Goals-Based Financial Planning”), again, indicates personalization in the form of goals-based investing can result in significantly greater accumulation of assets.

Source: The Value of Advice, © Copyright 2019 Morningstar, Inc.

10 Tips for Creating Thought Leadership that Sells

Expertise matters in financial services and a robust thought leadership program can create opportunities. However, not all thought leadership is created equal. When intermittent, inconsistent or too generic, thought leadership may be a poor use of resources, or worse, detrimental to your business.

Here are some ideas for generating thought leadership that can establish you as a specialist and start a meaningful conversation with clients and prospects.

Integration, Schwab-style

Technology continues to be a key driver in the investment management industry, with increasing convergence and blurring of the line between different firms’ offerings. Last Thursday, February 21, Schwab and Envestnet announced that Envestnet Tamarac is purchasing Schwab’s PortfolioCenter, a portfolio management and reporting application. Envestnet Tamarac, which uses PortfolioCenter as its primary portfolio management system and data source, looks to benefit from this acquisition in a number of ways, not least of which is eliminating the licensing fee it must currently pay to Schwab to use the software. In addition, this also gives Envestnet access to approximately 2,000 advisors that utilize PortfolioCenter directly through Schwab, providing an opportunity to market its other products to them. In an article on Financial Planning’s website, Andina Anderson, Executive Managing Director at Envestnet Tamarac, said this represents a significant opportunity to reach the smaller end of the advisor market.   

Sidestep for Schwab?

For Schwab, the story is a little more complicated. Until fairly recently, Schwab was focusing on developing multi-custodial portfolio management tools. This deal continues to signal Schwab’s move away from that based on the evolution of advisor preference for a custodian that allows them to select and integrate in whatever tools and technology they want from a wide array of providers. 

Back to Basics

On the portfolio management system side, Schwab Advisor Portfolio Connect™, “a simplified approach to portfolio management,” will become its core proprietary offering. Free to advisors who custody with Schwab, it is a “streamlined” tool directly integrated with Schwab’s custodial platform, so there is no need for daily downloads, integration or reconciliation, which can be a significant budget drag, especially for smaller advisors. Schwab continues to expand the capabilities of Portfolio Connect, and in 2019 will roll out a number of additional features, including support for Schwab’s Intelligent Portfolios.       

Owning the Dashboard

Schwab is also investing significantly in facilitating connections through the Schwab dashboard to a curated selection of investment and wealth management related applications. OpenView GateWay®, offered through Schwab’s Intelligent Technologies, provides single sign on (SSO) integration with a number of leading providers in aggregation, reporting, trading and rebalancing, financial planning, data analytics, etc. This enables Schwab to serve as the coordinator and consolidator, making it a much “stickier” relationship. 

Mission Possible?

In recent weeks an online neo-bank aptly named Aspiration launched a national TV ad campaign. The pitch is distinct and, we think, worthy of attention for the following reasons:

○ Unlike other financial institutions, even those that offer socially responsible products, Aspiration is a financial services firm whose core brand and value proposition is social responsibility. As its mission statement claims, “We didn’t set out to build a bank. We set out to build a better world.” Aspiration is “a new kind of financial partner that puts our customers and their conscience first”

○ In keeping with its mission, Aspiration allows its customers to determine how much they think is a fair fee to pay even if it is zero

○ Aspiration donates 10% of every dollar customers pay in fees to charity

○ Aspiration’s product set offers customers higher checking and savings rates than most banks, even online ones, as well as free ATM access “anywhere in the universe”

○ Aspiration also has two investment options available to both taxable and retirement accounts, a sustainable investing mutual fund and a low volatility mutual fund of funds, taking it beyond what most neo-banks currently offer

Aspiration’s messaging is clear, as is the apparent alignment of its goals and actions with those of its customers. The product set is simple, delivers on value, and reinforces its socially responsible agenda. For these reasons, we believe that Aspiration is a compelling offering and may be a model for alternative financial services firms going forward. 

Selling to Institutional Clients

1 Corporate Executive Board
2 Biznology
3 Gartner Group
4 Biznology
5 LinkedIn
6 CMO Council
7 LinkedIn

Logo Power

Zara is getting a lot of press for its new logo. If by some chance you haven’t seen the hailstorm of negative attention, you may want to Google it to see what all the hubbub is about. Or just search#zaralogo where you can find some truly funny and entertaining comments. We won’t join in on the Zara logo bashing, but now is a good time to discuss why companies change their logos in the first place.

Mergers and acquisitions

This one seems fairly obvious. If a company, in one way or another, joins another company, do they retain one name/logo and eliminate the other? Is one brand clearly the acquirer and/or does one brand have stronger brand equity? Often times, the merging of two or more firms creates the opportunity for a new name, resulting in the need for a new logo. The new entity hopefully offers something fresh and different to consumers, and a new name and logo are a great way to express that excitement.

The times, they are a changin’

For some companies, if their positioning strongly references and leverages their heritage and longevity, then the look of an old legacy logo is probably appropriate. Think John Deere, Coca-Cola and Johnson & Johnson, where their logos have been tweaked (the deer in the John Deere logo now leaps instead of landing, for instance), but essentially remain true to the original. General Electric is one of the oldest logos still in use, but, perhaps now is a good time for it to consider updating its logo to better express current business lines. Sherwin Williams’ logo has been in use for well over 100 years, and designers and branding specialists have been calling for a logo redesign for years. What some see as blood dripping over the earth hardly seems in line with all the elegant and inspiring sample projects they share. If a logo feels outdated and no longer represents the core mission of a company, then it’s time for a redo. 



Deciding to appeal to another market, such as high-net-worth or ultra-high-net-worth customers, may require an updated logo that appeals to that market or an altogether different name, logo and brand. Going up or down market has the potential of confusing a target audience and diluting the current brand, so a new logo and brand may be the right solution.

Moving Toward Market Dominance

Continuing to honor of the passing of index fund champion, Jack Bogle, we would like to point out the likelihood of an upcoming milestone. Sometime this year, or the beginning of 2020, investments in passive domestic equity mutual funds and ETFs will outstrip those in actively managed mutual funds for the first time ever.

The chart below tells the story. Twenty years ago, actively managed domestic equity funds hit $2.3 trillion in total assets, over 10 times the amount in passive. But as active funds suffered severe downturns in the market crashes of 2000 and 2008, assets in passive funds continued to grow fairly steadily. By November of last year, assets in domestic equity index products had pretty much closed the gap. 

In recent years, the spread in net new cash flows between passive and active has increased dramatically. If this trend continues, passive assets will move ahead in the next 12-15 months.

Perhaps more importantly, it does not appear that the relative growth advantage of passive is likely to end soon, suggesting that this type of investing will more securely establish itself as the core of the majority of investors’ portfolios.   

Jack Bogle’s Legacy

Much has been written this past week about Jack Bogle, who passed away on January 16, 2019, and his achievements. In addition to founding fund giant, Vanguard, he has been credited with practically inventing indexed mutual funds. A few years ago, Warren Buffett credited him with saving investors tens of billions of dollars over time.

This led to the question of how much Bogle may really have saved investors. According to our calculations, Mr. Buffett may have understated the amount significantly. According to Morningstar, net assets in index mutual funds as of November 2018 stood at just over $3.5 trillion, while balances of ETFs were about $2.1 trillion. Average costs for index mutual funds are about nine basis points. For ETFs, they are about 21 basis points. So the all-in costs are:

The difference in costs in one year alone ($44.34 – $7.68 billion) is more than $36 billion. Imagine how much this would have added up to over Bogle’s career!

This leaves out the question of performance, of course, but does prove that a significant portion of investors strongly believe in the index fund concept. This is in sharp contrast to when Jack Bogle launched the First Index Investment Trust (now the Vanguard S&P 500 Fund) in 1975, known at the time as “Bogle’s Folly.” Let’s take a moment to honor the memory of a true investment management visionary. 

The Callan Periodic Table Turns 20

Callan recently published its 20th Anniversary Edition of The Callan Periodic Table of Investment Returns. This chart has become ubiquitous as an illustration for the case for diversification and is widely used in marketing, particularly with individuals. The chart shows annual returns for an array of major asset classes, ranked from best performing for the year to worst performing. It was created by Jay Kloepfer, Executive Vice President and Director of Capital Markets Research at Callan Associates.

Every picture tells a story

The Callan Periodic Table communicates the risk of concentrating in one asset class and makes the case for diversification. “The enduring appeal of the table is its ability to be understood at a glance,” says Kloepfer. “And once you’ve seen and absorbed it, you can refer to it again and again. New insights still come to me even 20 years later!” As you look across the years and asset classes, which are color coded, it’s easy to see that the top performer one year typically reverts to the mean and is often one of the lower performing within a year or two. This holds true across asset classes, capitalizations and geography. Also clear is the wide range in absolute terms of what top and bottom performance means from year to year, with top returns ranging from 78.51% in 2009 (Emerging Market Equity) to 1.38% in 2015 (Large Cap Equity). Also compelling on the downside is the fact that the worst returns range from +4.33% in 2006 (U.S. Fixed Income) to -53.33% in 2008 (Emerging Markets Equity; note in both 2007 and 2009 it was the top performer).

Cash was king in 2018

Returns in 2018 were notable for a few reasons:

○ For the first time in the history of the table, Cash Equivalents was the best-performing asset class, returning 1.87%
○ This means, given the forecasted inflation rate range for 2018, investors essentially kept up with the cost of living
○ Except for U.S. Fixed Income, which had a return of 0.01%, essentially flat for the year, all other indices tracked in the chart had negative returns, which is the first time this has happened in the 20-year history of the chart

Given the potential for continued volatility in 2019, we anticipate the Callan Periodic Table will be a particularly useful and widely-used tool for advisors this year.