When I was in business school, the professors and their data convinced me that it was foolish to try to beat the market by purchasing individual stocks. The optimal plan is to stay fully invested across a mix of assets, minimize fees with index funds, and rebalance over time.
That was more than 20 years ago, and back then unless you were super-wealthy and could afford to spend 1% to 2% annually on a wealth manager, you had to do most of the work yourself. But today, web-based tools and advisors are available to fulfill my professor’s wishes at a fraction of the cost.
We’ve written about Betterment, FutureAdvisor, and Personal Capital (Update: See also, JemStep, demoing at FinovateSpring 2013). All are approaching the market with diverse investment choices (primarily ETFs) provided at much lower cost than the old-school wealth manager.
Another company gaining traction, along with a $20-million VC round last week, is Wealthfront (previously known as KaChing). It is a Palo Alto, CA-based startup targeting the 25- to 40-year olds in the tech industry. According to its Feb SEC filing it had 2,100 customers with $130 million of assets under management (AUM). That’s a solid $60,000 average account balance. In its latest press release, the company says it now has $170 million AUM (perhaps that includes the latest venture round).
Wealthfront provides a balanced portfolio of domestic and foreign-equity ETFs and bonds, depending on your risk tolerances. It also includes real estate (REITs), something Betterment does not currently offer. The startup manages your first $10,000 free of charge, then it charges 0.25% of your assets under management, similar to Betterment (note 1). The minimum investment is $5,000.
The company takes an active role in helping customers determine their risk tolerance. A series of 10 simple questions (screenshot 2) places customers into a portfolio optimized for their age, assets, income and risk-tolerance (screenshot 3). And the whole thing is overseen by a very biz-school-approved Chief Investment Officer, Burton Malkiel, the author of one of my college textbooks.
Bottom line: Banks and credit unions absolutely should be offering simple investment tools such as those found at WealthFront, Betterment and others. The problem, of course, is that investment accounts cannibalize deposits. There is just no way of getting around the fact that $20,000 transferred into an ETF (with a 25 basis-point fee) is $20,000 you can’t loan out (at a 4%-plus spread).
But consumers won’t be risk-averse forever. Eventually, those five-figure balances will find their way into something other than a 0.2% savings account. You might as well be the financial institution where customers make intelligent savings AND investment choices.
Wealthfront’s homepage emphasizes value-investing basics (25 March 2013)
Wealthfront risk-assessment question, number 1 of 10
1. Betterment charges a sliding scale depending on your minimum balance, 0.35% for accounts under $10,000, 0.25% for those under $100,000 or 0.15% for those above $100,000.
2. For a comparison of Betterment vs. Wealthfront, see the Quora debate.
3. For more info on bank-appropriate investment products, see our last report on online investing (May 2008, subscription). We also looked at Betterment, Simple and Personal Capital, in our True Virtual Banking Has Arrived (Oct 2011, subscription).