Scott Bell at I Heart Wall Street writes: “Personal finance just isn’t as personal anymore.” Nor should it be. You and your portfolio are not all that unique.
The Internet has changed nearly everything about our lives, why shouldn’t change personal finance as well? If it weren’t already obvious the old, wirehouse brokerage model is on the way out. Josh Brown writing at Financial Adviser noted:
With every passing month more and more brokers are abandoning the brokerage model. Nowhere is this trend more glaringly apparent than at the large-firm level…Ten years ago, the Wall Street wirehouse brokerage firm seemed unassailable – part of the very firmament underpinning the entire investment industry from coast to coast. Now there are questions about whether the model itself can remain viable once the retention deals roll off.
In place of the wirehouse model, brokers are converting to a registered investment advisers. However for a generation (or two) who have never lived without the Internet even this model seems clunky and outdated. It should be no surprise that entrepreneurs of this generation see an opportunity in a more Internet-centric model of investment management.
There a number of companies financial technology startups looking to upend the traditional investment management model. We noted a number of them in our post about there never having been a better time to be an individual investor. By applying the lessons of innumerable Internet companies to the investment model they are creating an entirely new model, one that largely eschews personal interaction with an adviser for insights gleaned from the application of analytics to real-life portfolios.
Zack Miller at Tradestreaming recently interviewed Bo Lu CEO of FutureAdvisor. If you listen to the podcast you will likely be surprised how much a company like Lu’s can do with your financial data. A post at SigFig using data from their clientele shows, for example, the damage investors do by overtrading. In short, there is already a lot of data out there that these companies can use to provide you with more efficient and tailored advice.
Mebane Faber at World Beta recently put together a great post that compares the services (and fees) of a number of companies pioneering this space. Some comparisons are difficult because the models include varying levels of service from managers who are also custodians to advisors that simply provide algorithmic-driven advice. Suffice it to say that most of these providers have fees well below that of full-service RIAs or brokers. Faber notes there is good reason why most investors could do well with sort of model:
Anything more than 0.5% or so on top of fund fees is either paid a) out of ignorance, which is not always the investor’s fault or b) as a tax for being irresponsible. For the latter I mean a fee to keep you out of your own way of chasing returns and doing something stupid, much in the same way someone pays Weight Watchers or any other diet advice program when you know what you should be doing (eat less, exercise more). Some broad generalizations here but trying to get to the data below. That fee is worth a lot if you cannot keep out of the way of your own emotions, and the evidence is massive in favor of that being the case.
The fact of the matter is that investors are drifting towards what Faber calls this “buy and hold” sort of model. That includes well-diversified portfolios built largely with index funds and/or ETFs. For the vast majority of investors who have little expertise or interest in investing this sort of aproach is perfect. A recent report by Charles Schwab shows that their “..investors don’t want to have to worry about active managers and their higher fees.” Hence the attraction of indexed ETFs.
The brokerage and now RIA models are built on the idea that your financial situation and requisite portfolio are unique. Therefore you needed personalized advice which comes with higher fees. The startups in this space substitute the analysis of so-called “big data” and algorithms for that personal touch. In short, your portfolio should likely look a lot like other people in roughly your same situation, of which there are thousands, if not millions in the US alone.
The Internet has already disrupted all manner of legacy business models. Apple disrupted music, PCs and likely TVs. eBay (and Craigslist) destroyed the classified ads. Amazon crushed the traditional booksellers. LinkedIn has disrupted recruiting. You get the picture. In short, if there is a business model out there that technology can disrupt, it likely will. The investment management model is largely a 20th century construction. Generations who feel comfortable putting their most intimate details in the Facebook profiles will likely not shy away from looking to the new raft of online money managers for advice when their time comes.
It may be a bit of a downer to think you and your portfolio are not all that unique. As we note in our forthcoming book most investors don’t want to trade, but simply want portfolio solutions that save them time and make their lives easier and less complicated. So for a wide swath of investors these sorts of services provide for the prospect for lower costs, better returns, less hassle and most of all more time to spend on the more important things in life.
The witch-hunting wisdom of Monty Python. (I Heart Wall Street)
Perhaps I’ve been a bit too harsh… (Financial Adviser)
FutureAdvisor Launhces Free Investment App – with Co-founder Bo Lu (Tradestreaming)
Are discount brokerages the fast food chains of investing? (SigFig)
There has never been a better time to be an individual investor. (Abnormal Returns)
How much do the major online money managers charge? A survey shows a range of fees. (World Beta)
Investors don’t want to worry about the complications of active managers. (InvestmentNews)