So, Not Really That Passive….

I had to laugh at this article on Forbes from a Robo Advisor firm explaining why they’re changing their asset allocation based on market valuations.  The best part is this:

We follow a fundamentally passive investment philosophy (the research on stock picking and active managers shows that they consistently underperform), so we often do nothing.

So, you’re actively changing your asset allocations based on market valuations, but also claiming to be passive? This is a new low for those who try to pitch the myth of passive investing.

Let’s get a few things straight:

• Asset allocation is always an active endeavor. Some strategies are less active than others, but there’s no asset allocation that is a true passive global financial asset portfolio replicating strategy.  In other words, virtually everyone chooses to actively deviate from the one global cap weighted portfolio (roughly 45% stocks and 55% bonds right now).  No one makes zero discretionary decisions in the course of their asset allocation, rebalancing, reinvesting, etc process.
• Your performance will be driven not only by the size of your frictions, but primarily by how you actively choose to allocate your assets (eg, 60/40 stock bond vs 80/20 stock/bond).
• The more active investors who perform poorly (relative to a low fee correlated index) do so  largely because they incur high frictions (taxes, fees, etc).
• Active managers who perform poorly (relative to a low fee correlated index) do so largely as a result of the high fees they charge.
• Since we are all active asset pickers the primary distinction between “active” and “passive” MUST be about high cost versus low cost.

The strange part here is that this particular Robo Advisor charges a management fee of 0.5% and an average fee of 0.15% for its underlying funds. In other words, they’re charging you 0.65%, selling you their myth about being passive (because it’s a popular marketing term) and then making active asset allocation decisions based on dubious valuation metrics.  They’re neither low fee nor passive.  This whole discussion really bothers me. If you’re going to sell the idea of “passive indexing” it better sure as hell be low fee (and I mean really low fee, like Vanguard really low fee). Otherwise, you’re really no better than the high fee active managers you regularly criticize.

NB – The title of this piece is stolen from Scott Bell.