Optimizing your portfolio across multiple brokerage accounts – with Simon Roy


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Optimizing your portfolio across multiple brokerage accounts – with Simon Roy

It’s been a real pain for investors which multiple brokerage accounts to get a birds-eye view of all their accounts. Startup investment manager, Jemstep takes account aggregation to a whole ‘nother level.portfolio manager and investment advisor

Jemstep’s Simon Roy joins me on Tradestreaming Radio to talk about how his firm’s technology analyzes client portfolios. Once everything is thrown into the analytical blender, Jemstep clients are treated to a holding-by-holding analysis of their portfolios with concrete suggestions on how to improve/optimize their portfolios.

This is exactly what I was describing in my book, Tradestream your Way to Profits, when I discussed the investing trend toward automated, professional-grade services.  Check out Jemstep’s video below as well.

Listen to the FULL program

About Simon Roy

Simon is the Executive Vice President of Corporate Development at Jemstep.  He was the CEO of Accrue Software and a senior consultant with McKinsey and Company.

Read the transcript

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Announcer: You’re listening to Tradestreaming Radio with your host Zack Miller. Expand your mind, become a better investor with tools, tips and technology from the smartest investors on the planet.Zack: Welcome to Tradestreaming Radio. I’m you’re host Zack Miller and this is the place where investors learn directly from experts. I don’t know about you, but I’ve got this itch. And the itch has always been that it’s been traditionally really hard to get a unified login for multiple brokerage accounts. What I mean by that is that most people, as we know from the data, have multiple brokerage accounts, they don’t have all their assets with one firm.Now, how do you get a view of everything that’s going on? And of course there’s been lip service, and there’s some products out there that help you get a view of everything, but I still have found it sort of an imperfect solution. There have been a couple of companies over the past couple of years that have really targeted this area. Jemstep is one of them, and today’s guest is Simon Roy from Jemstep. Jemstep took it a step further.

The first step you’re going to have, if you want to get a complete overview, if you want to take hold of all of your holdings wherever they may be, is to hook up your multiple brokerage accounts to Jemstep. It throws it all into a unified blender and shows you your overall portfolio. That’s the first step, and that’s important but not crucial. The next step is actually saying “Well let’s look at all the holdings across all my accounts and optimize it.”

And Jemstep has created exactly that, and a performance optimizer where Jemstep will take you through this process of defining you risk, defining your investor personality, and then analyzing each and every security in your portfolio against that. Then it’s an optimization engine that says basically “Well, if you own this large cap fund, maybe there’s a better or cheaper one out there for you. Why don’t you go grab that one?”

I think this is a big leap forward in investing, for individual investors, and I hope to see more of these types of tools in development in the future. Wikinvest SigFig product, I know that because I’m helping them on a consulting basis, is going to look something very similar to what Jemstep is doing.

So I invited Simon on to talk about what Jemstep is, how it helps people manage their portfolios, how it helps them improve their investing results, and maybe where they’re headed in the future. I hope you enjoy this weeks program. I’m trying to do a mix on Tradestreaming in bring in authors with different strategies as well as entrepreneurs and business owners who have products that can help us all. Hope you’re enjoying that.

You can always check out the archives of this program at my website tradestreaming.com. Come over there and sign up for the free email as well and I’ll keep you posted of all that’s going on. You can also find the archives of this program on iTunes, and you can subscribe there via iPhone or iPad. Let us know, give us a rating. Let everyone know if you’re enjoying and getting value out of this program. I appreciate your time, very grateful, hope you have a great holiday and thanks for checking in with us. Speak to you soon.

Great, so can you introduce yourself and your company?

Simon: Yeah, my name is Simon Roy, I’m executive vice president of corporate development for Jemstep. Jemstep is an online financial services site focused on helping individual investors make better investment decisions by providing them with objective, fact based guidance to help them make the appropriate decisions for their unique circumstances.

Zack: Before we get into the nitty-gritty of what the product does, Simon, can you talk about the genesis of the product. Has this been something that you guys have been working on and percolating for years? Walk me through how we got here. Because it is an innovative product.

Simon: Thanks Zack. The product actually has been in development just over three years, and the genesis of the idea came from Michael Blumenthal who used to be a stock broker on the west coast. He had the opportunity to return back to his home country, South Africa, to run a family business, but now found himself in the position of being an individual investor seeking advice and relying on advice from a broker in the states. He found it very frustrating taking the advice and not really having a way to tell whether what was recommended to him actually was right for his circumstances, his family.

The typical issues are is this right for my time frame, risk horizon, et cetera. He started looking for services and tools that could help him do this, and he really came away empty handed in terms of something that really answered his question. So from there the genesis, and the germ of the idea, for Jemstep emerged. The real germ was “Why can’t I build a service that takes my circumstances and my needs into account. And then looks at the universe, of in this case mutual plans and exchange traded funds, and finds the best funds for me within the asset class that I’m looking.”

He spent a number of years recruiting a team, putting together the product, and what we have out today is the outcome from that. The methodology that we developed has recently been patented, and approved as a patent, given the innovative aspects of it.

Zack: The question is something we talk a lot about on the show is why wasn’t that person, why wasn’t Michael, getting the advice previously? Meaning either his adviser, if he has an adviser working, should be able to provide that for him, or if he’s doing it on his own, I can go to Yahoo Finance as well as anybody else can and at least target the top performing fund. Is it and issue that’s a lot harder to get your hands around? How do you find what a best performing fund is?

Simon: If I could just unpack the questions you asked . . .

Zack: Yeah, all of them.

Simon: The reason is there are a number of important elements and issues within there. Let me talk about Michael and a broker. I think, having spent a bit of time working with Wall Street firms myself when I was working on the east coast, and looking at the incentive structure within Wall Street, I think the bottom line is the large wire houses are designed to look after the interests primarily of the large wire houses. And so the brokers are incented to make sure that they provide adequate service to their clients but on the margin would rather sell a fund that has a high fee for them and their firm than one that doesn’t.

So, there’s a mismatch of incentives within that structure. And I think that’s the one thing, incentives matter. And the brokerage firms incentives are out of line, and as we see now there’s a big fight in Congress around exactly that issue. Should brokers have a fiduciary responsibility to look after their clients as opposed to their current approach where they really don’t have that responsibility as investment advisers? I think the incentives are an issue.

The second thing is there really aren’t tools that are easily available to brokers and others to be able to say “Here is my risk profile, here is my timer rise. And here is my preference towards passive, active, whole series of dimensions. For this taxable account find the best funds for me.” I think the tools are missing, and that combination means that most people don’t get that level of personalized service. I think that’s the first side when it comes to the brokers, the incentives and the tools aren’t really in place.

The second question that you’re asking is “Can’t I just find the best funds on Yahoo finance or elsewhere on the web.” I think the web has done, and the services on the web have done, a great job of providing you with comprehensive data about the funds. So, you can find out pretty much anything you want about any fund out there, and that’s a huge step forward and it’s put a lot of power in individuals’ hands.

The issue is they’re basically providing you a screening mechanism, so you can find the hundred five star Morningstar hedge funds out there, but you need to choose one. How do you know which one is the right one for you given that you’re 62 and need income? Or that you’re 24 and are willing to take a fair amount of risk for the long term return? And that’s where Jem . . . go ahead.

Zack: It’s an extremely complex calculus, right? Because, there really is no such thing, objectively, as the right fund for everybody, right? What you’re saying is that given my risk profile, given where I am in my life, if we’re looking at the same asset class as large cap mutual funds, the output of that decision making is going to be different for every individual.

Simon: Exactly, and we take it down to the level where we look at you, your time rise and your risk et cetera, and evaluate the funds on that basis. But we also add things like “Is this a taxable account or not?” And depending on the tax status of the account we will evaluate funds differently. In taxable accounts, current income will be discounted a little more highly, unless you’re explicitly looking for income, where as if it’s a tax advantage account it won’t be in any punitive waving against taxing efficient returns.

What we’re really doing, at the end of the day, is looking to provide the quality of service that a multi-millionaire client or registered investment adviser would get through the internet. It’s a level of personalization and support in selecting the right investments that really isn’t available. We sort of think of it as Morningstar meets eHarmony. We bring that level of quality personalization to the investment selection process.

Zack: I love that image, romantic investing.

Simon: Match maker, match maker.

Zack: What’s interesting is not only is it a personalized tool, it’s an optimization tool as well. This is something, that even though I’m a professional investor, something I struggle with. If I’m crafting a portfolio, you’ve got the efficient frontier and you’re talking about different asset class and diversification, it’s still very hard to fit the puzzle pieces together. What you’ve done is made that process a lot easier for people. Can you now walk through . . . so, you’ve got this aggregation tool, somebody comes to Jemstep, they sign up, they give their credentials for their online trading accounts and then what happens?

Simon: We link the brokerage accounts to Jemstep, and basically what we’re doing is we’re getting a record of the investment holdings that you have. We will show you every one of the accounts that you’ve linked and every holding within that account. And each account can be assigned to a specific investment goal. Three typical examples would be retirement, secondly might be kids’ college account, and the third might be the trading account where you speculate or perhaps are active in your investments.

So for anyone of those goals, lets take trading, what Jemstep does is looks at all of the accounts and the holdings against the trading profile and evaluates those holdings using the ranking engine and identifies the funds that are quality funds for your goal, funds that are just okay and then focuses on the bottom third of the funds which are very bad fits for that goal and weak performance. What we’ll do is we’ll identify them explicitly and show you recommendations of which of those to sell and what we’d recommend as the first choice to purchase to replace that holding.

So the user can see a list of, call it five, funds that are really weak performance for them and then what to replace them with, and they can do a comparison with as much detail as you want. If you’re a sophisticated investor you can look at value at risk and value at gain and various ratios that you’re interested in, and for the average investor we will give high level clear indications as to why the recommended fund is superior investment to the existing holding.

Zack: Walking through the product myself, I think you guys did such an amazing job with that tiered information. Like you said, if you just want very practical information you’ve got it, and then there’s this step down, drill down process where you can get more and more information. The core is just really simple and really clean, it was a great user interface by the way.

Simon: I appreciate that Zack. We’ve worked hard to try and make the initial flows very simple but robust in terms of the quality of the recommendations. And then we try to apply this, what we call progressive, disclosure. We give you access to as much information as we have available and the analytics that we built on top of it, and part of it is really driven by some of our core values, which are on our website. And that is that an informed investor is a better investor and so our goal is to help educate and support investors in making decisions and that’s hopefully reflected on the site.

Zack: Can we talk a little bit about the recommendation engine? I come in, a lot of my holdings are fine, but you’ve identified some that are red flags. How do you then go out and compare another mutual fund to the one that I have? What are you, again you don’t need to talk about the actual details of the algorithm per se, but what are you comparing? How does one become a better fit for me?

Simon: It’s a great question. Think if it conceptually just as two puzzle pieces we’re trying to fit together. On the one side you have you, your situation, your goal and all of the elements that relate to that goal. The time rise and the risk, your attitude towards ETF’s, towards mutual funds, active management, passive management, the type of account. Many attributes that define your investment style, preference and circumstance.

What we do with that information is we create a weighting out of 100, 100%, using a classic one portfolio theory investment analytics and we build that weighting based on your preferences, we customize it to you. We walk in with a set of weightings and various attributes, risk, return, fees, income, management, et cetera.

Then what we do is we look at the universal mutual funds, or ETF’s, depending which we’re looking at in this case. And we break each of those funds down into 70 or so attributes, and each attribute is evaluated against that same attribute across all of the funds, so it may be five year return, or it may be value at risk, value at gain, whatever it is, income.

And then we do a best fit against the 100% weightings that we have for you. In that way we take your needs and we evaluate the whole universe of funds using your weights and come up with one, two, maybe three thousand in large cap mutual funds. So if you have an existing holding, that holding will have a summary score out of 100 for you, lets call it 50, which is the cumulative value of all the funds performance attributes and then we’ll look for the top scoring fund, maybe it’s 78 a Jem score of 78.

And we evaluate the two against each other and we’ll say “Wow, there are much better options available for you based on your unique preferences, goals and investment needs.” And we’ll then show that to you, so that the user, in essence, sees “I hold this, this is how well it fits my needs. Here is a better fund, this is how much better it fits my needs.” They can then compare and ultimately make a decision. At the end of the day we’re really about helping investors make a decision. The back in analytics is really a tool to support that goal of helping people actually pull the trigger on their own investments.

Zack: This might sound like a crazy, and thank you very much for explaining how that works. This may be a crazy question, but is it possible that the engine will spit out, obviously performance is just one of many attributes, is it possible the engine will spit out a recommendation that has performed worse than the holding that the person holds?

Simon: It’s not a crazy question and the answer is yes.

Zack: Okay. That’s intellectually honest.

Simon: Let me be clear what I mean by that. Performance in the way that the unsophisticated investor would think about it, which is just purely what was the return in and of it self.

Zack: Not risk adjusted return.

Simon: Right, and there’s more to it, we’re trying to incorporate more to it than that. So performance is one attribute, we have 70 attributes of which performance is less than 20% in total in terms of the number of attributes. Let me give you a scenario where it would potentially give a lower performing fund. Let’s say you’re a retiree and your broker put you in a high risk . . .

Zack: Biotech fund.

Simon: Biotech fund, exactly. Or emerging market fund. A really high risk concentrated whatever it is. And it returns 20% over the last two years. Not risk adjusted but just 20%. You came in and said “Look, I’m retired, I really need income. My goal is stability and stability and maintenance of capital. Et cetera.” They typical retiree profile.

We would run through your portfolio, do the health check, and we would say “Whoa, you have a fund, yes it’s done well in the last two years, but when you look back at it’s profile and you map it against the weightings that you said are important to you and that we feel are important given your circumstances, this is the wrong fund for you.”

We would quite easily and happily say “You need to get out of this fund that happened to earn more for these two years or year and get into a more stable, whatever it may be fund.” And I think that’s the key to what we’re doing, one size doesn’t fit all and one performance attribute doesn’t fit all. So we’re really trying to look at that holistic picture of “What are all the things that are important to you. What are all of the elements or attributes of the fund characteristics and let’s match the right set to you.”

Part of the reason you have to do it through the computer is, I speak for myself, I can keep maybe three things in my mind but when it gets over three things I just end up going to the things that I’m most comfortable with and those are often not the right things. We’re really trying to use the power of the computer with quality data and quality analytics to help people through this tough matching problem.

Zack: It’s interesting and it’s been my experience that a lot of times investors are very much focused on just one attribute and that might be performance and they don’t really understand how that ties into their overall risk profile or some of their financial goals. So kudos to you guys for looking at the entire picture. To get this type of information, these recommendations, you had to get registered as an investment adviser, right?

Simon: Absolutely, to your earlier question about incentives and why some of their advice . . . incentives matter basically. We are giving explicit investment advice to individuals who come in and they’re giving us their trusts in terms of telling us their investment goals and preferences and what their current investments are and we have a fiduciary responsibility to look after their interest and provide them with guidance which we feel serves their needs. So we’ve decided to go with that model where we’re explicitly fiduciary on behalf of the clients that use Jemstep. We work hard to do our best to live up to that responsibility.

Zack: Awesome. So somebody comes in, they get this financial health checkup, you’re bubbling up recommendations to replace some holdings in their portfolio, what keeps people coming back now? Is this the type of thing, I come in, I do the check, I buy and sell what I need to do and then I don’t necessarily have to come back? Or is there some continuous reason for me to come back and keep logging into Jemstep?

Simon: So, the current holdings that you have… As you make the trades, we will continually update your holdings so we’ll reflect any changes that you’ve made.

Zack: And I make the trades through my brokerage account?

Simon: Yeah, you make the trades through the brokerage account. We help, guiding you to that decision, and down the road we’re looking at ways to make that execution even easier for the individual. We provide links to brokeraging firms to support that. As you make trades we reflect that and you can see how well they’re performing. Similarly, as the performance of the funds or your personal needs change and circumstances change, we’ll keep track of that and you can modify your profile accordingly.

Whenever you come back to Jemstep we’re going to have an up to date evaluation of your portfolio, and on the site we have a dashboard which allows the individual to see their profile, the performance of their individual finance and their portfolio. And we have alerts where we identify funds they may want to evaluate to upgrade. So there’s some we give as hard recommendations and then we’ll be giving softer recommendations where the individual … we say “This fund is not our burning platform, but you may want to evaluate it because you have a long time horizon, you’d really benefit from getting into a different fund.”

That dynamic aspect of the site makes it quite compelling for users to come back on an ongoing basis. That’s what we have currently, but down the road, what we’re moving towards is a more comprehensive portfolio management overlay were we’ll be able to evaluate the performance of your portfolio as a whole and your [asset allocation 24:37] against your goals and help you optimize at the portfolio level as well. We think that piece will make it all the more compelling as a site to help solve the problems that individual investors are dealing with, but also help make it a site you’ll want to visit as your go to investment advice site.

Zack: In general, because it’s an aggregator, it sits on top of your local brokerage sites. I’d rather go back to there, to your site, than have to log in to all my other brokerages.

Simon: Absolutely Zack, anyone who has more than one brokerage firm . . . that in and of its self is a great value to see everything in one place.

Zack: One thing you mentioned there, and actually you alluded to what my next question was going to be, I think we can probably end on this one. You’re talking about moving the platform to the portfolio level. So when somebody comes in right now you’re making security level recommendations “You have mutual fund A, you should buy mutual fund B because that fits better into your overall financial personality.” You’re not making implicit asset allocation decisions in your recommendations, or are you currently?

Simon: That’s an insightful question. Right now we are making apples to apples comparisons. So if you come in with a large cap fund we will evaluate that fund against other large cap funds, and we’ll make a recommendation if it’s not a good fit for your profile but within large cap. So that is the apples to apples piece. We also have the means to say . . . where you can come in and say “You know, I’ve heard about this emerging market thing; help me find the best ETF in emerging markets.”

And you can enter “I’m looking for emerging market funds” and you can actually give some pretty explicit criteria for it “I want only ETF’s in emerging markets that offer options. And I’m really concerned about bid-ask spread.” You can take it down, if you’re sophisticated, to a very low level and get investment advice for asset classes that you may not currently be in. We offer the opportunity for people to do apples to apples but also sort of round about other investment classes, long short funds, any ETF mutual fund that’s out there, asset class that’s out there. But ultimately where we want to go is to provide that top down view of…

Zack: Overarching.

Simon: Overarching. What is my goal? Retirement, whatever it may be. How am I doing against that goal, given my current portfolio? And then, what can I do to improve my odds of hitting that goal? And that’s both at the asset allocation level, and we’ll be able to show optimization of portfolio asset allocation, and all the way down to answering the question “Well, given my new asset allocation, how do I get there from here?” Meaning “How do I transition my portfolio from the current holdings to the target holdings.”

I think the combination of that top down asset allocation portfolio evaluation, down to the Jemstep ranking and evaluation engine is we’re hoping something that will be very powerful because at the end of the day we see ourselves as a decision support and behavior change engine. We’re trying to help individuals make decisions and transact, and that combination, I think, is the final piece that we feel will really push this to the next level.

Zack: What an incredible problem set that you’re dealing with, just incredibly complex issues underlying all of that. It’s amazing what you guys have built. Simon Roy of Jemstep. Thank you for participating.

Simon: Well Zack, I appreciate the opportunity and look forward to future interactions.

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