The Real Problem With SigFig’s $10/Month Portfolio For Everyone

There is an insane arms race going on in the “let the computer be your financial advisor” space. Today SigFig announced that it’s gonna charge only $10/month to automatically pick and rebalance your portfolio for you, no matter how much money you have.

No matter what you think about the efficient market theory (which all of these algorithms are based on), active vs passive investing, humans vs computers doing the investing, or even the companies that are providing these services, just take a second to marvel at the fact that there is now a company charging 10 freaking dollars to manage your money in a (relatively) intelligent way.

Ok you can stop, because here come the issues.

One, as I have pointed out in the past, these algorithms are based on extremely flawed research and an understanding of how the market works. Yes, they are better than you as the average person trying to invest the money yourself, god knows that’s the truth, but are they good at making you money or managing risk, no, no they are not. I won’t get into why here as I have laid out that case several times before, and frankly I am too lazy to dig those blog posts up and link them here.

Two, no matter how automated you make things, humans can still pull the plug, which they almost always do when things go bad, which they always do at some point, because that’s what happens in the market. Your mom will still go in and sell everything because SigFig can’t lock here out for her own good when volatility spikes (new feature?).

And here’s my real issue, it’s more of a longer term thing, but it’s not something that I’ve heard anyone talking about.

At the micro level (the quantum level if you will), the market is definitely not a zero sum game. We can all beat the benchmark, because we don’t have to invest in every stock in the benchmark at all times. Is that difficult, yea, can it in theory be done by everyone, yea.

But at the macro level there is more of a zero sum game issue because large amounts of capital in and out of asset classes effect the movement of the value of assets. This is why large hedge funds are relatively secretive about their short term positions, they don’t want to get squeezed out of positions due to their own risk factors or suffer alpha leakage from others front running them.

Which brings us to SigFig and the rest of the algo driven financial advisors. I can see a day coming in the not too distant future when they have won the game. Most people with less than $500K in investable assets have given their money over to these auto allocation and rebalance algorithms.

And then….

What do you think the largest quant funds in the world are going to do when they know the algorithms that rebalance these portfolios, or better yet, what do you think they will do to trip certain thresholds in the algorithms and then take advantage of the resulting movement in and out of assets by those portfolios.

Oh man like shooting fish in a barrel. I can’t get the words “market manipulation” out of my mouth fast enough.

These algos all basically operate under the same rules and it’s not hard to model out what the flow of assets in and out of certain asset classes are going to be under certain conditions. And it’s probably not hard to bring some of those conditions into reality if you know you can benefit from it later.

This is a piece of market structure that I promise you will be an issue down the road, because while it doesn’t seem these companies are going to massive businesses at $10/month, the technology will certainly disrupt the live financial advisor model, at least for those with under $500K of assets, which is most people and most of the money.

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