Robo-advisors for charitable investing?

In the last few years, one of the fastest-growing trends in personal investing has been robo-advisors. The concept of a robo-advisor is that your money is managed by rules set by a software program, with little or no contact with a human advisor. As a result, the fees for investment management are lower (0.5% of assets for robos, versus 1% or more for humans) and the holding costs are lower (0.25% for the exchange-traded funds held by robo-advisors, versus 2% or more for the mutual funds or hedge funds recommended by humans). The largest robo-advisor in Canada is Wealthsimple, founded in September 2014. If robo-advisors work well for individual investors, perhaps they could also work well for institutional investors, such as foundations and charities?

The ecosystem of charitable investing

At first glance, there is certainly a case to be made for robo-advisors. Costs are lower, returns are likely to be higher than those earned by most humans (index investing is hard to beat over the long term), while convenience and simplicity are higher. To fully consider the suitability of robo-advisors for charitable investing, however, we need to consider the ecosystem of investing for a foundation or charity. Charitable investing follows a series of decisions, ranging from Discern (deciding whether and why to invest); Invest (planning the investment program); and Govern & Lead (owning the investment plan and building leadership capacity for long-term success).

Where robos can’t reach

Clearly, a robo-advisor can add value for institutions in the Invest phase, especially if they have relatively little interest in investing or are holding high-cost investments such as mutual funds or hedge funds. However, it is not clear what a robo-advisor can add to the other phases. The Discern phase is about articulating the purpose of the organization; setting its objectives; deciding what impact it should achieve, for whom; and formulating a plan of action to achieve this, often with the support of partners or volunteers. This is pre-eminently a domain of human decision-making and it is difficult to conceive how a robo-advisor could contribute to this phase. The Govern & Lead phase is about owning and overseeing the investment plan but can also include using the plan as part of the strategy to build leadership capacity in the organization or the charitable system as a whole. Again, these are deeply human decisions, involving ethics, leadership and community-building.

Stronger together

If we look at investing as a technical exercise self-contained within the Invest phase, consisting of risk tolerance, asset mix and product selection, then foundations and charities would be well served by a robo-advisor. However, we have seen that the Discern and Govern & Lead phases are areas of human decision-making, where an algorithm cannot deal with the ambiguity and complexity of the decisions involved. Moreover, the phases are not separate but related. For example, when we decide that we want to contribute to a cleaner environment as a key objective and increase our investing in clean energy companies (the Discern phase), this in turn will affect how we structure the investment portfolio to balance long-term growth and short-term spending (the Invest phase). Or when we decide to engage the next generation of a family foundation with a focus on impact investing in our communities (the Govern & Lead phase), this in turn will affect the risk and return profile of the portfolio (the Invest phase).

Rather than choose between robos and humans, we want to take the best elements of both and create a better way. Robos are unable, at least for now, to tackle the complexity of the questions beyond the Invest phase. Humans are often unwilling to invest simply and at low cost. Yet combined, these approaches are stronger together.