(PUB) Investing 2015

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Fund Family Shareholder Association

www.adviseronline.com

DO YOU REALLY WANT TO

hand

your portfolio off to a machine? Think

really hard about that.

Much is being made these days

of the rise of the robo-advisers, those

automated and semi-automated finan-

cial advice and portfolio manage-

ment services that Charles Schwab,

Betterment, Wealthfront and Vanguard,

among many, are now offering.

Vanguard, in particular, has been

transitioning billions of dollars of

investor assets from passive alle-

giance to its funds, to paid clients of its

Personal Advisor Services

group. No

doubt, you’ve noticed that Vanguard

is promoting its service ceaselessly.

Of course, what would you expect?

With something above $20 billion in

the service, they’re pulling in north of

$60 million in fees. That pays for a lot

of country club dues for Vanguard’s

executive class on top of the salaries for

its advisers.

I’m hoping, however, that Vanguard

will take some of that money and spend

it on their robos rather than sending it

to the C-suite, because if my experi-

ence with just one of their services,

the Vanguard Portfolio Analytics Tool,

is any indication, the computers run-

ning the show over there are in need

of some serious human intervention.

(And those salaried advisers Vanguard

has hired to help you aren’t the ones to

do it, because they’re liable to get their

hands slapped, or much worse, if they

take a position that doesn’t mesh with

Vanguard’s.)

Here’s my story, which started out

very innocently as an exercise in com-

paring my

Growth Model Portfolio

one of Vanguard’s “core” ETF port-

folios. To be clear, I wasn’t using the

Personal Advisor Services

, but rather,

a tool Vanguard offers on its website.

You may not know it, but Vanguard

offers up model portfolios made up of

ETFs in 11 different allocations rang-

ing from 100% stocks to 100% fixed

income, with incremental changes of

10%, so there’s a 90%/10% model,

an 80%/20% model and so on. These

model portfolios use Vanguard’s “core”

ETFs, Russell index ETFs, S&P index

ETFs and CRSP index ETFs for the

equity side of the ledgers. That’s 44 dif-

ferent model portfolios to choose from.

I figured I’d just test-drive

Vanguard’s Portfolio Analytics Tool

based on its most basic and most heav-

ily recommended ETFs used in the

“core” portfolios. The Vanguard Core

100/0 portfolio allocates 68.6% of

assets to

Total Stock Market ETF

29.4% to

Total International Stock

ETF

and 2.0% to a money market fund.

Essentially it’s 100% stocks. With the

Growth Model Portfolio

holding just

3% or so of its assets in my cash substi-

tute,

Short-Term Investment-Grade

this seemed the appropriate pairing.

So, I punched in the ticker symbols

and allocations for the

Growth Model

Portfolio

and selected Vanguard’s 100/0

portfolio for a comparison. It couldn’t

have been simpler.

But the output was anything but

simple. And much of what I got was

completely random. On top of which,

the report that appears on your screen

is not the report that appears when you

ask for a downloadable PDF document.

Let me give you just a few examples of

the silliness that is this “tool.”

Let’s start at the top. Of course

there’s the obligatory comparison of

expenses, 0.09% versus 0.36%, and pie

charts showing allocations. And then

there’s a line graph comparing the past

three years or so of performance for the

ETF portfolio and my

Model Portfolio

I say “three years or so” because the

graph ran for a 37-month period, which

seems rather random. Anyway, I was

thrilled to see that the computer showed

the performance of the

Model Portfolio

was 18.75% per annum versus 14.23%

for the Vanguard portfolio.

The

Model Portfolio

runs a little

more expensive on measures like price/

sales and price/book, etc. and has a

smaller allocation to emerging markets

than Vanguard’s portfolio. Nothing out

of the ordinary or surprising. I did

find the Modern Portfolio Theory stats

showing a negative alpha of -0.91 for

Vanguard’s portfolio versus a positive

2.91 for my

Growth Model Portfolio

’s

a bit strange. Partly it’s because the two

portfolios are compared to slightly dif-

ferent benchmarks, which you wouldn’t

know if you didn’t click on the “bench-

mark” link at the bottom of the table.

Vanguard’s index funds actually “lose”

alpha to straight indexes because of

their expenses. The portfolio managers

in the

Growth Model Portfolio

, how-

ever, add alpha, or in simple terms, they

add stock-picking smarts.

Then there’s the diagram show-

ing how evenly distributed the port-

folio’s “stock sectors” are allocated.

The Vanguard ETF model was actu-

ally slightly askew with an overweight

to cyclical stocks, while the

Growth

Model Portfolio

was spot-on evenly

allocated.

Now, here’s where things begin to

ROBO ADVICE

Rise of the Machines, and of Errors

The Seven Questions

VANGUARD ALSO OFFERS a simple, “7-question tool” that they say will give you a “custom invest-

ment plan.” I tried that one as well. As an aggressive investor with a long time horizon, I was eager

to see how they’d allocate me, given that they say, up front, that the only funds they recommend

are

Total Stock Market Index

Total International Stock Index

Total Bond Market Index

Total International Bond Index

, the

STAR

LifeStrategy

funds and

Prime Money Market

Surprise: My recommended plan (remember, this is a custom plan) was to allocate 60% of my

money to Total Stock Market Index and 40% to Total International Stock Index. Let’s just say I

didn’t click on the “Invest Now” button.