Chapter 13: How Can Robo-Advisors Help To Enhance Investment Returns?

The introduction of a new technology is generally accompanied by skepticism and low acceptance. Given that the first Robo-advisors only came to market in 2008, they still have to achieve mainstream status with retail investors as well as institutionals. One concern that so regularly raised pertains to the difficulty for investors to assess which asset allocation approach applied by Robo-advisors delivers the most favorable long-term performance. This paper addresses this need by comparing different asset allocation and rebalancing methodologies that are utilized by Robo-advisors and their impact on risk/return and drawdowns with empirical data.

The first methodology is a 60% equities and 40% bonds allocation (henceforth referred to as 60/40) that rebalances quarterly. For the example of a Swiss investor, the portfolio would comprise an Exchange Traded Fund (ETF) on the SMI with a weight of 60% and an ETF on Swiss government bonds with a weight of 40%. Investors rebalance quarterly to bring their exposure back to the original 60/40 allocation. If, for example, equity markets rose during the last quarter more strongly than bonds, parts of the equity ETF would be sold, and the proceeds spent to increase the holdings of the bond ETF.