Ever since robo-advisors became available to retail investors in the first decade of the 21st century, people have been wondering: Would they eventually replace human investment managers? Let's compare the workings of automatons to those of a particular traditional firm. It won't completely answer the question of man vs. machine, of course, but it will provide insight into the pros and cons of each approach.
Two Types of Advisors
Let's introduce the players. In this corner: Waddell & Reed Financial Inc. Founded in 1937, this asset management and financial planning firm serves individual, corporate and institutional clients. Headquartered in Overland Park, Kan., the company includes a national network of 1,170 financial advisors working in 400 offices.
In the opposite corner: Robo-advisors, aka digital advisors, who offer automated, algorithmic-based investment management. Born around 2010 and based – well, everywhere – they operate in different ways. Some platforms, such as Betterment and Wealthfront, hold your assets and manage them with no human interaction. Others, like Personal Capital, combine both automated and human advisor services.
Comparing Investment Styles
Investment management style is client-driven and personalized at Waddell & Reed. The advisors build unique financial plans for their clients using various investment and insurance products, including the Ivy mutual funds that come in a variety of share classes and fee structures.
In contrast, robo-advisors invest a client's portfolio in a variety of low-cost index and exchange-traded funds (ETFs) or – for those who want to control their own assets – makes investment recommendations. Some automated robo-advisor platforms also recommend individual stocks. (See A Guide to Choosing the Best Robo-Advisor.)
Costs are one big difference between Waddell and Reed and the typical automated robo-advisor platform. According to Morningstar, Inc., the average expense ratios of its mutual funds have been on the high side: municipal bond funds as high as 1.12%, and international stock funds, 1.75%. However, in July 2018, the firm announced a reduction in fees in several funds, bringing them under 1%.
In contrast. robo-advisors Wealthfront and Betterment's fees range from 0.15%-0.25% (see Betterment vs. Wealthfront: A Fee & Fund Comparison). Tack on the average exchange-traded fund expense ratio of 0.15% and you’ve got the annual cost of a robo-managed portfolio of 0.30% to 0.40%. Of course, other robo-advisors have higher fees especially if they offer the option human contact.
When comparing Waddell & Reed's funds' returns against their category averages, the results are equivocal. In some years, such as in 2011, 2012 and 2013, Waddell & Reed beats the category averages. More recently, though, the traditional firm underperformed the averages.
Are the results worth the higher traditional broker fees? Consider that the advisor managed portfolio must earn returns greater than the management fee and expense ratios before the investor nets anything. With a robo-advisor, your portfolio has a lower fee bar to surpass before you begin compounding your returns.
The Bottom Line
The Waddell & Reed model is the traditional approach where human financial advisors work with clients. It includes proprietary branded funds in addition to other funds, which may or may not be the best alternative for every client. In general, the robo-advisor platforms may have less human interaction. Their results are driven by complicated computer algorithms designed to maximize returns with minimal risk. Each individual must do their own due diligence and compare costs, services, and results to find their own preferred financial guide.
For related reading, see Robo-Advisors and a Human Touch: Better Together?