When Your Robo Investor Has a Mind of Its Own
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What robo-advisor scenario is this episode warning investors about?
I'm J.R.
Whalen in New York. The robots are taking over in the world of investing, but there are scenarios where robots being left alone to run the numbers could be problematic for investors. We'll explain in a moment. First, these money headlines. A report from the Federal Reserve Bank of St. Louis suggests Americans who entered the world in the 1980s could be on track to become the last recession's lost generation. The St. Louis Fed research finds that as of 2016, those born in the 1980s had wealth levels 34% below where they would be absent the financial crisis and its aftermath. In comparison, people born in the 1970s had wealth levels that were 18% under where they should have been, while folks from the 1960s were down 11%.
The late 2000s recession threw up an obstacle for younger workers. People of the 1980s generation started their working lives in a time of troubled investment markets, also high unemployment and persistently weak wage gains. A study from the UK's University of Warwick indicates there's a surefire way to rein in CEO pay. That's bringing hedge fund activists. The study found that CEOs received on average $329,344 more than their peers in total pay in the two years before an activist targeted their companies. One year after, that difference had shrunk to $51,435, with CEO base pay now $27,704 lower than their peers. But the study also found that CEO pay begins to rise again two years after activism.
and baseball Hall of Famer Tom Glavin and his wife custom-built an Atlanta home that incorporates both gothic elements and a sports playground with a small-scale baseball field.
What recent Fed and wealth research headlines set the context for investor risk?
It's now on the market for $6.75 million. The 16,132-square-foot home sits on more than three acres and has eight bedrooms and nine bathrooms. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. Would you have built your car any differently than a robot did? Would you have built your television any differently? Maybe not, but you might be inclined to invest differently than some robo-advisors do. And Jason Zweig, the Wall Street Journal Intelligent Investor Columnist, joins us to discuss. So Jason, this comes down to, as you point out in your column, online investment managers or robo-advisors having minds of their own, and you focus on one in particular that is moving clients' money into a new fund and is not phased at all by declines in that fund.
Yeah, that's correct. There's a new fund that came out in January called Wealthfront Risk Parity Fund. And pretty much all eligible clients of the Wealthfront robo-advisor are being automatically moved into that fund, up to 20% of their money in some cases. And that might work out well in the end, but it's kind of an open question as to whether all of those people are really aware that this is what they want.
And this is clients with more than, is it $100,000 in assets?
Yeah, it's more than $100,000 in assets, and there are a couple other criteria as well. But it does apply to a lot of people, and at this point, it's on track to have roughly $900 million in it for a fund that just started a few months ago.
Yeah, and you mentioned in your column that this fund has been around, this has been going on for four months, and the fund has seen a 9% decline during that time. But four months is really too short a period to recognize a trend in either direction to say, oh, well, this is now going to be declining from here on out as far as we can see. So four months, you can't really panic over that.
Well, no. You certainly shouldn't panic, although the question here is why the fund's performance is so far out of phase with similar funds, and there are quite a few, and the others have all performed pretty closely in line with each other. And given that this is a brand-new, untested fund... and also that people had to opt out if they didn't want to participate. Otherwise, they automatically would find their money invested there. It does sort of raise the question of whether that technique is appropriate of automatically pushing people's money into a new product.
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