German robo-advisors more conservative than their American peers

By David Tuckwell on Thursday 23 November 2017

Savings and Investment

Solactive study finds European robo-advice is more risk averse

European and North American robo-advisors are different, it turns out.

American robo-advisors use riskier investment strategies than their German counterparts and are reaping the consequences, a new study has found.

While robo-advisors in both Germany and the US use ready-made portfolios for similar breakdowns between asset classes, US advisors are happier to take on more risk, especially in equities a new industry survey by Frankfurt-based index provider Solactive has found.

The survey sifted through American and German robo-platforms to see how they invest money.It found there was little difference in the number of ETFs each robo-adviser used, with robos in both countries averaging roughly 10 ETFs.

Robo-advisors in both countries rely on “plain vanilla ETFs” – ETFs that track famous indexes like the S&P in the US and the DAX in Germany – to make up the spines of their portfolios. Newer and more innovative ETFs, like smart beta and multi-factor, are rarely used, the study found.

Robo-advisors were also happy to use commodity and cash ETFs – like gold-backed products – as well as property tracking ETFs, such as those that are backed by real estate investment trusts. But but all robo-advisors avoid using alternatives, like leveraged or currency ETFs, as they take on too much risk.

Both country’s robo-advisors exhibited something of a home bias and were happier to invest in companies in their own countries. Thus German robos had on average 40% of their equity exposure in European companies. In the US the home bias was stronger, with robos having 52% of the equities directed at the home market.

There was also a difference in price. US robos are significantly cheaper than German ones, with an average difference of almost 50 basis points. The average US robo-advisor charges 0.25 percent of assets under management while German providers charge 0.67 percent, the study found. But its authors urged against making too much of fees.

“Costs are clearly an important aspect when selecting ETFs for a portfolio. The pressure on fees… is also putting pressure on robo-advisors,” said Timo Pfeiffer, head of research at Solactive.

“However, pricing should not become the sole argument…Pricing clearly has a lower relevance compared to the quality of the allocation model, or the overall ETF selection.”

The higher costs come, to some degree, from the higher cost of ETFs in each country. The average ETF fee in Germany is 0.29%, while in the US only 0.18%. Robo-advice platforms pass these costs on to investors.

The study also partly attributes the cost differences to market maturity. The US robo-advice market is older and more mature.

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