Robo-advisor portfolios may be well diversified, they also contain construction gaps that should not be present in well-constructed portfolios. Post discussing this in broader context schedule for 3 May 2017 http://wp.me/p2Oizj-HV

1. Looking Beyond the Low-Cost Service
W H I T E PA P E R
ROBO-ADVISORS
Robo-advisors are growing in popularity among millennials by providing
a convenient, low cost, automated, algorithm-based investment platform
to manage investment portfolios with initial investments as low as $1,000.
While it is good news that millennials are starting to manage their wealth
early, the growth of their wealth is highly dependent on comprehensive
financial planning, not just on the portfolio put together by the robo-advisors.
The strength of a portfolio can be measured by its key characteristics such
as asset allocation, diversification, stock and bond risk, investment costs,
and overall portfolio risk and efficiency.
When we compare the portfolios from the top five robo-advisors to a benchmark
portfolio with several decades of measurable performance, we find that
while the robo-advisor portfolios are very well diversified, they also contain
several gaps in key characteristics that should be present in well-managed
portfolios. Here are the key gaps identified:
• Large allocation of assets to emerging markets
• Lack of small-cap and value tilts that earn superior returns over the
long term
• Higher credit risk in the bond portion of the robo-advised portfolios
through exposure to junk bonds
• Significant variations in asset allocation recommendations across os-
tensibly similar risk profile offerings, particularly with respect to large
allocations to either stocks or to cash
• The above non-risk-adverse allocations reduce overall efficiency of
the portfolio, which means the investors might not be getting the
optimum return possible for the risks they are taking

2. Robo-advisors are online wealth management platforms that provide auto-
mated, algorithm-based portfolio management advice without the use of
human financial planners. Robo-advisors have benefited greatly from the
growing investor appetite for index-oriented investment products, such as
index funds and ETFs.
Robo-advisors are one of the largest growing segments in the wealth man-
agement industry over the last few years. As of February 2016, they were
reported to have more than $50 billion of assets under management
(AUM) led by passive management industry veterans such as Vanguard and
Schwab, as well as venture-backed technology startups like Betterment,
Wealthfront and Personal Capital.1
Robo-advice platforms provide a quick and almost-exclusively-online route
to investing in a portfolio, making them particularly enticing for millennials.
Robo-advisors typically require initial investments as low as $1,000 – $10,000
and charge extremely low fees — on the order of 40 bps or less annually —
while including both global stock and bond exposures, making them popular
with cost-conscious investors.
The convenience and low-cost nature of robo-platforms is difficult to dispute,
but there has been little analysis as to the investment quality of their actual
investment portfolios. How do these largely algorithm-based portfolios hold
up when compared to more traditional wealth management firms’ portfolio
construction methods?
The purpose of this paper is to answer this question by comparing the structure
of several popular robo-advisor portfolio recommendations to a well-defined
benchmark portfolio.
INTRODUCTION
1
Alessandra Malito and Ellie Zhu, “Top 5 robo-advisers by AUM,” InvestmentNews, February 25, 2016
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
2

3. Robo-Advisor Selection
The first step in evaluating robo-advisor portfolios is to create a sample set of
firms from the robo-advisor universe. We focus on the top five service pro-
viders in the U.S. as the appropriate sample set for the study (refer to Table
1 in the appendix). The primary criteria for choosing the sample set for the
study are AUM, growth in AUM, number of years of service and brand name.
Portfolio Analysis Tool
We entered the portfolio asset allocation of each robo-advisor into a Portfolio
Gap Analysis program that uses Morningstar databases for in-depth analysis.
The Gap Analysis Program is designed to compare a specified portfolio to a
benchmark portfolio and detect deficiencies as well as potential opportunities
for improvement. The key characteristics of an evaluated portfolio include
asset allocation, diversification, stock and bond risk, investment costs, port-
folio risk and efficiency.
Portfolio Selection
Traditional advisors as well as robo-advisors provide a range of portfolios
based on the risk preferences of investors, where the investor risk prefer-
ence is typically characterized as conservative, moderate or aggressive. In
this study, a moderate risk portfolio is used to evaluate whether the structure
of the robo-advised portfolio is optimized to meet investors’ financial goals.
We obtained the asset allocation details from each robo-advisor’s webpage,
based on what each robo-advisor identified for an average, moderate-risk-
profile investor who is investing for retirement (refer to Tables 2 to 7 in the
appendix). The asset allocation details are similar to the allocations pre-
sented by a study published by Market Watch.2
The robo-advisors use auto-
mated programs with detailed questionnaires to help individuals self-select
into a risk profile. There is a question as to how well the robo-advisors
METHODOLOGY
2
Victor Reklaitis, “We asked 4 robo advisers and 4 human advisers for portfolios for the same investor,” Market
Watch, May 2, 2015
ROBO-ADVISORS: Looking Beyond the Low Cost-Service
3

4. understand the financial situation of an investor in order to accurately
determine the risk profile. This critical topic will be discussed in detail
in a follow-up paper.
Benchmark Selection
Loring Ward’s model portfolio asset allocation recommendations for a
moderate risk investor as of September 2016 were chosen as the benchmark
for evaluating the portfolio recommendations of the five robo-advisors in
this study. Loring Ward’s portfolios are globally diversified as well as spe-
cifically tailored to the needs of their clients by financial advisors. They are
constructed with DFA mutual funds with tilts towards small-cap and value
securities. They embody an Asset Class Investing philosophy that is based
on almost nine decades of data, analysis and research, insights from be-
havioral finance and close relationships with leading academics, including
Dr. Meir Statman and Nobel Laureate Dr. Harry S. Markowitz.
Results
The Portfolio Gap Analysis we performed of the portfolio recommendations
developed by the top five robo-advisors reveals significant gaps with respect to
the benchmark portfolio (see Table. 1). The first observation is that Vanguard
and Schwab have gaps in two of the 10 key characteristics of the portfolios.
Second, the newly established firms Wealthfront, Betterment and Personal
Capital have four or five gaps in the portfolios. In the next section, the gaps
observed for each key characteristic are discussed in detail.
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
4

5. Table 1 — Gaps in Robo-Advisor Portfolios with Respect to the
Benchmark Portfolio
Asset Allocation: One of the most important steps in efficient portfolio
construction is setting the proper asset allocation. In a study conducted by
academics Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower,
asset allocation was found to account for 93.6% of the variation in portfolio
return.3
The proper allocation must be determined with care and in context
with each client’s investment goals and personal risk tolerance.
Gaps in Moderate Portfolios of Robo-Advisors
Vanguard Schwab Wealthfront Betterment
Personal
Capital
Asset Allocation
Global
Diversification
Stock Concentration
Risk
Stock Risk Analysis
Bond Quality
Bond Maturity
Management
Expenses
Trading Costs
Portfolio Efficiency
Portfolio Risk
Profile
8
8 8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
3
Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower. “Determinants of Portfolio Performance.” Financial Analysts
Journal 42.4 (1986)
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
5

6. The Betterment Portfolio has the biggest gap with respect to asset allocation,
with 90% in stocks and just 10% in bonds for a moderate portfolio (see Fig. 1).
The Schwab Portfolio has an unnecessarily large ‘cash-drag’ for our hypo-
thetical investor, with nearly 8.5% of the money in cash.
Fig. 1 — Asset Allocations in the Betterment and Schwab Intelligent
Portfolios Have Significant Gaps Compared to the Benchmark Portfolio
Global Diversification: On the general issue of global diversification there
does not appear to be a gap in the robo-advisor portfolios, but it is important
to note that robo-advisors have allocated more of their portfolios to emerg-
ing markets as exhibited by Wealthfront in Fig. 2. Emerging markets have
higher volatility due to currency risk, inflation risk, institutional risk, liquidi-
ty risk and political risk. From Loring Ward’s capital market assumptions the
Sharpe ratio, which is the ratio of an asset’s return over risk, is lesser for
emerging markets compared to U.S. stocks and developed international
stocks.4
This means even though investing in emerging markets could
generate higher returns, it also increases the risk of each of these moderate
portfolios. Hence it is recommended to allocate 6% or less to emerging
market securities as observed in the benchmark portfolio.
10%
90%
8.5%
21.5%
5%
65%
2%
65%
33%
Cash
Bond
Stock
Other
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Lo
Highest
CreditQuality
Duration
Lowest
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth
MSCI World Marke
(MSCIAC World Ind
Current
Portfolio
Recomm
Portfolio
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
Total Stocks 7,097 9,514 2,417
Top 10 Stocks 5.75% 7.59% 1.84%
Cash Efficiency 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
U.S. Core Equity 44 53 56 3
International Core Equity 43 33 38 5
Emerging Core Equity 13 14 6 8
Not Classified 0 0 0 0
4
“Asset Class Capital Market Assumptions Methodology,” Loring Ward Portfolio Strategy and Research
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
6
Schwab Intelligent
Portfolio
Betterment Loring Ward
Portfolio

7. Fig. 2 — Global Diversification in Wealthfront’s Portfolio Compared to
LW Portfolio
Stock Concentration Risk: Stock concentration risk refers to undiversified
company-specific risk. All the robo-advisors were very well diversified with
the top 10 stocks accounting for less than 10% of the portfolio resulting in
low stock concentration risk. To give an example, the Schwab Intelligent
Portfolio has nearly 7,000 stocks and the top 10 stocks represent only 5.75%
of the portfolio (see Fig. 3).
Fig. 3 — Stock Concentration Risk in Schwab Intelligent Portfolio
Compared to LW Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth
MSCI World M
(MSCIAC Wor
Current
Portfolio
Re
Po
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
Total Stocks 7,097 9,514 2,417
Top 10 Stocks 5.75% 7.59% 1.84%
Cash Efficiency 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
U.S. Core Equity 44 53 56 3
International Core Equity 43 33 38 5
Emerging Core Equity 13 14 6 8
Not Classified 0 0 0 0
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
E
R
C
U
U
C
10%
90%
8.5%
21.5%
5%
65%
2%
65%
33%
Cash
Bond
Stock
Other
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortes
Highest
CreditQuality
Lowest
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Growth
MS
(MS
Curren
Portfo
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
Total Stocks 7,097 9,514 2,417
Top 10 Stocks 5.75% 7.59% 1.84%
Cash Efficiency 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
U.S. Core Equity 44 53 56 3
International Core Equity 43 33 38 5
Emerging Core Equity 13 14 6 8
Not Classified 0 0 0 0
18%
16%
14%
12%
10%
8%
6%
4%
AnnualizedReturns
18%
16%
14%
12%
10%
8%
6%
4%
AnnualizedReturns
18%
16%
14%
12%
10%
8%
6%
4%
AnnualizedReturns
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
7

8. 2%
65%
33%
Cash
Bond
Stock
Other
Less
Risk
Shortest Longest
Highest
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Ward
olio
Gap
4 2,417
% 1.84%
9 0.91
nt Loring Ward Gap
Stock Risk Analysis: The benchmark portfolio emphasizes small-cap and value
stocks in an effort to increase the return potential of the stock allocation. Research
by Professors Eugene Fama and Ken French established size and value as two
key factors that contribute to expected return.5
The robo-advisor portfolios had
lower small-cap and value stock weightings than the benchmark portfolio. The
stock style matrix for all the robo-advisor portfolios compared to the benchmark
portfolio is shown in Fig. 4.
Fig. 4 — Stock Style Risk Across Robo-Advisor Portfolios Compared to
LW Portfolio
10%
90%
8.5%
21.5%
5%
65%
2%
65%
33%
Cash
Bon
Stoc
Othe
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest
Highest
CreditQuality
D
Lowest
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
S
L
Growth
MSCI W
(MSCIAC
Current
Portfolio
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
Total Stocks 7,097 9,514 2,417
Top 10 Stocks 5.75% 7.59% 1.84%
Cash Efficiency 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
U.S. Core Equity 44 53 56 3
International Core Equity 43 33 38 5
Emerging Core Equity 13 14 6 8
Not Classified 0 0 0 0
18%18% 18%
5
Eugene F. Fama and Kenneth R. French “The cross-section of expected stock returns”, The Journal of Finance, Vol. XLVII,
No. 2, 1992
Vanguard Schwab Wealthfront
Betterment Personal Capital
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
8

9. Bond Risk: There are two primary risk factors that contribute to the level
of volatility in bonds: credit quality and maturity. Historical evidence shows us
that investors have not been adequately compensated for extending the credit
quality of their bond portfolio below investment-grade (i.e. a credit rating below
BBB). While low-quality bonds have a higher average yield, during periods of
deep recession their risk of default and loss of principal is higher than invest-
ment-grade companies. The benchmark portfolio we used for comparison is
comprised 100% of investment-grade bonds. We observed that the bond
quality of the robo-advisor portfolios is lower on average, with some including
junk grade bonds, as observed in Fig. 5.
Robo-advisors don’t have any gap with regards to maturity or global diversification
in their bond portfolio.
Fig. 5 — Bond Risk Across Robo-Advisor Portfolios Compared to LW Portfolio
10%
90%
8.5%
21.5%
5%
65%
2%
65%
33%
Cash
Bond
Stock
Other
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest
Highest
CreditQuality
Dura
Lowest
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Sma
Larg
Growth
MSCI World
(MSCIAC Wo
Current
Portfolio
R
P
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
Total Stocks 7,097 9,514 2,417
2%
33%
Cash
Bond
Stock
Other
Longest
uration
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
mall Small Small
Vanguard Schwab Wealthfront
Betterment Personal Capital
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
9
Current Portfolio
Recommended
Portfolio

10. Portfolio costs: Management expenses and transaction costs are less than 40
bps for the robo-advisors, except Personal Capital that charges 89 bps for wealth
management.
Portfolio efficiency: A portfolio is efficient if the investor gets the maximum return
for risk that they are willing to take. The risk and return estimates for different
asset classes used to construct the portfolio are best estimates; therefore a range of
returns is possible for a specific risk, even for an efficient portfolio. This range of
returns for different risks results in an efficient range of diversified portfolios.
Wealthfront and Betterment portfolios are not within the efficient range, as seen in
Figure 6.
Fig. 6 — Betterment and Wealthfront Portfolios are Below the Efficient Range
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
Total Stocks 7,097 9,514 2,417
Top 10 Stocks 5.75% 7.59% 1.84%
Cash Efficiency 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
U.S. Core Equity 44 53 56 3
International Core Equity 43 33 38 5
Emerging Core Equity 13 14 6 8
Not Classified 0 0 0 0
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 3
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
Total Stocks 7,097 9,514 2,417
Top 10 Stocks 5.75% 7.59% 1.84%
Cash Efficiency 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
U.S. Core Equity 44 53 56 3
International Core Equity 43 33 38 5
Emerging Core Equity 13 14 6 8
Not Classified 0 0 0 0
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 3
8.5%
21.5%
5%
65%
2%
65%
33%
Cash
Bond
Stock
Other
Less
Risk
Shortest Longest
Highest
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Small
Large
owth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
7,097 9,514 2,417
5.75% 7.59% 1.84%
y 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
44 53 56 3
43 33 38 5
13 14 6 8
0 0 0 0
Deviation
0% 25% 30% 35% 40%
Deviation
0% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
Efficient Range
Recommended
Current
U.S. Market
U.S. Fixed Income
Cash
65%
65%
Other
Less
Risk
Shortest Longest
Highest
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Less
Risk
Shortest Longest
Highest
CreditQuality
Duration
Lowest
More
Risk
Small
Large
rowth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Small
Large
Growth Value
MSCI World Market
(MSCIAC World Index)
Current
Portfolio
Recommended
Portfolio
Charles Schwab
Portfolio
Loring Ward
Portfolio
Gap
7,097 9,514 2,417
5.75% 7.59% 1.84%
y 0.08 0.99 0.91
Global Market Wealthfront
Portfolio
Loring Ward
Portfolio
Gap
% Weight % Weight % Weight % Weight
44 53 56 3
y 43 33 38 5
13 14 6 8
0 0 0 0
Deviation
20% 25% 30% 35% 40%
Deviation
20% 25% 30% 35% 40%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
AnnualizedReturns
Standard Deviation
0% 5% 10% 15% 20% 25% 30% 35% 40%
Efficient Range
Recommended
Current
U.S. Market
U.S. Fixed Income
Cash
Wealthfront
Betterment
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
10

11. Portfolio Risk: Financial independence at retirement requires taking into consider-
ation factors with fiduciary implications, such as the future earning potential of the
client and current and future liabilities — such as student loans, home mortgage,
children’s education plans, moving to a different state for retirement and several
other unique situations. Holistic financial planning needed to ensure financial in-
dependence at retirement is essential to understand the risk profile of an investor
and eventually the portfolio risk. Thus, holistic financial planning becomes the
most critical first step of the wealth management experience.
Moreover, the financial regulatory landscape is constantly changing and the
new fiduciary requirements that are about to be mandated by the Department
of Labor (DOL) are significant. In a recent white paper, Melanie Fein, an attorney
who served as senior counsel to the Board of Governors of the Federal Reserve
System, suggests that robo-advisors may not be able to meet the fiduciary stan-
dards largely because they don’t always provide portfolio analysis that examines
the risk and reward features of an investment in the context of the portfolio as a
whole, and as part of an overall investment strategy that considers other invest-
ments, assets, liabilities, sources of incomes and other resources.6
Robo-advisors provide a free automated advisory service that attempts to under-
stand the basic financial needs of the clients. However, experienced registered
investment advisors typically have a deep conversation with their clients regarding
future financial needs and can build a comprehensive financial plan for a nominal
fee. An in-depth conversation with an experienced advisor is important for millen-
nials to help them picture multiple, complex future financial scenarios, and we
believe it more than justifies the nominal fees charged for future potential
financial independence.
6
“Robos and the challenges of fiduciary advice” white paper by Investment News
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
11

12. Robo-advising is an innovative service that will most likely have an impact on future
money management. The low asset minimums and low fees gear the service
towards millennials who cannot yet afford to invest with a traditional financial
advisor. While inexpensive, the portfolios of these robo-advisors appear to be
constructed inefficiently and may expose young investors to risks they may
not fully understand.
Robo-advised portfolios provide global diversification, and have a large portion of
assets allocated to emerging markets, significantly increasing portfolio risk. Their
lack of small and value tilts also lowers the potential of their returns. These port-
folios also have bond risk due to exposure to low quality junk bonds and longer
duration bonds. The deficiencies in the robo-advisor portfolios show that these
investors might have risk in achieving their future financial goals.
Finally, the robo-advisors lack the benefits of holistic wealth management with a
real-life advisor who takes into account specific situations with fiduciary implications,
such as moving to another state in retirement or personal situations such as plan-
ning for a special needs child or for specific charitable bequests. We believe that
holistic wealth management is the key to achieving future financial independence
for many investors.
CONCLUSION
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
12

13. Table 1 — Robo-Advisor Universe with Total AUM of $50 Million or More7
Robo-Advisor Services AUM ($million)7
Vanguard Personal Advisors 37,000
Schwab Intelligent Portfolio 7,400
Betterment 4,000
Wealthfront 3,000
Personal Capital 2,500
Asset Builder 671
Future Advisor (owned by Blackrock) 250
Rebalance IRA 225
Liftoff 150
SigFig 70
WiseBanyan 50
Etrade Adaptive Portfolio NA (started in 2016)
Fidelity Go NA (started in 2016)
APPENDIX
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
13
7
AUM as of Q1 2016

14. Table 2 — Asset Allocation for a Moderate Portfolio Developed by Wealthfront
Asset Allocation Wealthfront
Name of Investment Ticker
% of
Portfolio
U.S. Stocks
Vanguard Total Stock Market ETF VTI 20.0%
Vanguard Dividend Appreciation ETF VIG 15.0%
Foreign Stocks
Vanguard FTSE Developed Markets ETF VEA 17.0%
Vanguard FTSE Emerging Markets ETF VWO 13.0%
Bonds
iShares iBoxx USD Investment Grade Bond ETF LQD 15.0%
iSharesJ.P.MorganUSDEmergingMarketsBondETF EMB 8.0%
Other Vanguard REIT ETF VNQ 12.0%
Table 3 — Asset Allocation for a Moderate Portfolio Developed by Betterment
Asset Allocation Betterment
Name of Investment Ticker
% of
Portfolio
U.S. Stocks
Vanguard Total Stock Market ETF VTI 16.2%
Vanguard Value ETF VTV 16.2%
Vanguard Mid-Cap Value ETF VOE 5.2%
Vanguard Small-Cap Value ETF VBR 4.5%
Foreign Stocks
Vanguard FTSE Developed Markets ETF VEA 37.5%
Vanguard FTSE Emerging Markets ETF VWO 10.5%
Bonds
Vanguard Total International Bond ETF BNDX 3.6%
VanguardTotalBondMarketETF BND 3.2%
iSharesiBoxxUSDInvestmentGradeBondETF LQD 1.7%
VanguardEmergingMarketsGovernmentBondETF VWOB 1.6%
Fees: Investors pay a management fee of 0.35% for their first $10,000 with New York City–based Betterment, or $3 a month
if they’re not auto-depositing at least $100 a month. The next $90,000 costs you 0.25%, and beyond that the fee is 0.15%.
Fees: Investors don’t pay a management fee for their first $10,000 at Palo Alto, Calif.–based Wealthfront, and above that
amount the fee on assets is 0.25%.
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
14
Basis Point: Basis point (BPS) refers to a common unit of measure for interest rates
and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%
(0.0001), and is used to denote the percentage change in a financial instrument.
Sharpe Ratio: The Sharpe ratio is a risk-adjusted measure of return. It is calculated
using the standard deviation and excess return to determine the return per unit
of risk.
Standard Deviation: Standard Deviation is a statistical measurement of dispersion
about an average, it depicts how widely the returns have varied over a certain
period of time.

15. Table 4 — Asset Allocation for a Moderate Portfolio Developed by Personal Capital
Asset Allocation Personal Capital
Name of Investment Ticker
% of
Portfolio
U.S. Stocks Domestic Equities NA 44.0%
Foreign Stocks International Equities NA 19.0%
Bonds
Domestic Fixed Income NA 20.0%
ForeignFixedIncome NA 5.0%
Other
Cash NA 1.0%
Alternative Investments NA 11.0%
Table 5 — Asset Allocation for a Moderate Portfolio Developed by Schwab
Intelligent Portfolio
Asset Allocation Schwab Intelligent Portfolio
Name of Investment Ticker
% of
Portfolio
U.S. Stocks
Schwab Fundamental U.S. Large Company ETF FNDX 11.0%
Schwab U.S. Large-Cap ETF SCHX 8.0%
Schwab Fundamental U.S. Small Company ETF FNDA 7.0%
Schwab U.S. Small Cap ETF SCHA 4.0%
Foreign Stocks
SchwabFundamentalInternationalLargeCompanyETF FNDF 8.0%
Schwab International Equity ETF SCHF 5.0%
Schwab Fundamental International Small
Company ETF
FNDC 5.0%
Schwab Fundamental Emerging Markets Large
Company ETF
FNDE 5.0%
Schwab Emerging Markets Equity ETF SCHE 4.0%
Schwab International Small-Cap Equity ETF SCHC 3.0%
Bonds
U.S. Corporate High Yield Bonds SHYG 8.0%
VanEck Vectors Emerging Markets Local
Currency Bond
EMLC 7.0%
VanguardMortgage-BackedSecuritiesETF VMBS 3.0%
VanguardTotalInternationalBondETF BNDX 2.5%
SPDRBarclaysIntermediateTermCorporateBondETF ITR 1.0%
Other
Cash N/A 8.5%
iShares Gold ETF IAU 5.0%
Schwab U.S. REIT ETF SCHH 3.0%
Vanguard Global ex-U.S. Real Estate ETF VNQI 2.0%
Fees: Does not charge a management fee.
Fees: Investors pay a management fee of 0.89% to Personal Capital for the first $1 Million, and it progressively decreases
to 0.49% for clients that invest more than $10 Million.
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
15

16. Table 6 — Asset Allocation for a Moderate Portfolio Developed by Vanguard
Asset Allocation Vanguard
Name of Investment Ticker
% of
Portfolio
U.S. Stocks
Vanguard 500 Index Admiral VFIAX 22.0%
Vanguard Extended Market Index Admiral VEXAX 8.5%
Vanguard Small Cap Value Index Admiral VSIAX 9.5%
Vanguard Total Stock Market Index Admiral VTSAX 5.0%
Foreign Stocks Vanguard Total International Stock Index Admiral VTIAX 20.0%
Bonds
Vanguard Intermediate-Term Bond Index Admiral VBILX 2.0%
VanguardLong-TermInvestmentGradeAdmiral VWETX 3.0%
VanguardTotalInternationalBondIndexAdmiral VTABX 8.0%
VanguardTotalBondMarketIndexAdmiral VBTLX 20.0%
VanguardShort-TermBondIndexAdmiral VBIRX 2.0%
Table 7 — Asset Allocation for a Moderate Portfolio Developed by Loring Ward
Asset Allocation Loring Ward
Name of Investment Ticker
% of
Portfolio
U.S. Stocks
DFA US Core Equity 1 I DFEOX 15.0%
DFA US Large Cap Value I DFLVX 12.0%
DFA US Small Cap I DFSTX 8.0%
Foreign Stocks
DFA International Value I DFIVX 14.0%
DFA International Small Company I DFISX 7.0%
DFA Emerging Markets Value I DFEVX 5.0%
Bonds
DFA Five-Year Global Fixed Income I DFGBX 17.0%
DFAOne-YearFixedIncomeI DFIHX 16.0%
Other
Cash N/A 2.0%
DFA Real Estate Securities I DFREX 4.0%
Fees: Investors pay a management fee that is dependent on the client’s assets as well as the client advisor’s assets with Loring
Ward. Clients with assets less than $500,000 pay a management fee between 0.5% and 0.65% based on the client advisor’s
assets with Loring Ward. Management fees progressively decrease as the client’s assets increase. Clients with assets greater
than $5 Million pay a management fee between 0.1% and 0.2% based on the client advisor’s assets with Loring Ward.
Fees: Investors pay a management fee of 0.3% to Vanguard for the benefits of a Vanguard advisor, a customized financial
plan and ongoing portfolio management.
ROBO-ADVISORS: Looking Beyond the Low-Cost Service
The risks associated with investing in stocks and overweighting small company and value stocks potentially include
increased volatility (up and down movement in the value of your assets) and loss of principal.
Diversification neither assures a profit nor guarantees against loss in a declining market.
LWI Financial Inc. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission.
Securities transactions are offered through its affiliate, Loring Ward Securities Inc.,member FINRA/SIPC. Dimensional
Fund Advisors is an investment advisor registered with the Securities and Exchange Commission and is unaffiliated with
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