New investment managers added to Wealthfront

Wealthfront announced the addition of 3 new investment advisors on their investment platform.

As per the firm:

Towle & Co. (Value Strategy | Min. Outside Wealthfront: $500,000)
Towle specializes in a long-term, deep-value investment strategy that seeks to uncover significant discrepancies between stock market prices and underlying company values. Through Towle, you can invest in well-run companies with strong market positions and low price-to-sales ratios: a way to buy operating leverage and economic activity on the cheap!
Barton Investment Management (Growth Strategy | Min. Outside Wealthfront: $1,000,000)
Barton believes the market fails to appreciate and correctly value the full potential of enterprises that create new markets. Its concentrated portfolio of carefully-selected younger growth company stocks allows investors to capitalize on these market inefficiencies while supporting innovation.
CWC Advisors (Small Cap Strategy | Min. Outside Wealthfront: $1,000,000)
CWC began providing investment services in 2000 to high net worth individuals, and within a few years, attracted the interest of institutional investors. Its strategy consists primarily of contrarian U.S. companies with recent price under performance, corporate liquidity and/or fundamental valuations at historically low levels. Now you can invest with CWC, too.

The Future of Investing, Startups, and the $11,000,000,000,000 Question

Online finance lags

The news of personal finance tool Wesabe shutting down last year made it pretty clear that Mint.com is on its way to fully owning the online personal finance space.  The company’s port-mortem pretty much capitulates that.  But personal finance is just a small part of a much larger, overarching problem that affects all of us: planning for a financial future.  While this certainly includes managing household cash flows, it also involves buying a home, choosing 401(k) plans, putting money into the stock market and fixed income investments, and planning for retirement.

This begs the question: with so much money at stake, why does online finance continue to trail other industries like travel? When planning an international trip online, I know exactly whom to trust for advice and why they’re trustworthy, where to look to compare similar products, and have transactional platforms into which to submit my order.  But in finance, most people still don’t even know where to begin.

Hedge fund traders are using supercomputing high-frequency trading tools to make money in good markets and bad while we still can’t even decide which mutual funds are right for us. We require truly comprehensive solutions instead the current piecemeal, silo-based approach in online finance.  At stake is our future and over $11 trillion of mutual fund assets in the U.S.

Current Players

You can look at the way competition is shaping up online in various silos:
  • Personal Finance: Startups in this space are focused on developing value-added services to help users track and manage money flows.
    • Tracking/Tweaking: Mint.com has done really well capturing new users to adopt web/mobile tools, just as Quicken was a similarly powerful force on the PC.  Intuit, which now owns both products, is positioned really well for future expansion.   Personal finance is a huge problem to tackle and it’s really early in the game.
  • Investing: The investing process involves researching various options, transacting, and ongoing portfolio management with analytic tools.
    • Researching: Investors begin the investment process with idea discovery, bubbling up ideas to populate their portfolios.
      • Piggybacking investment ideas: New services like AlphaClone not only make easier tracking of the investment activities of storied investors like Warren Buffett but also provide portfolio development tools to backtest and manage entire portfolios made up of piggybacked ideas.
      • Long tail of financial content: As the costs of publishing have been pushed to zero, we’re enjoying a bull market in investment content.  Sites like Seeking Alpha and StockTwits provide great tools to plug into the collective tradestream. Wikinvest has taken more of a collaborative approach with its content and data.
      • Screening 2.0: Smarter tools like Validea help investors filter through large numbers of stocks using algorithms and artificial intelligence to identify worthy portfolio prospects.
      • Crowdsourcing stock picks: Sites like Piqqem allow investors to tap the wisdom of the investment crowds.
      • Expert networks: SumZero is an online investing club of super-smart people sharing really good analysis on stocks.  Other Q&A tools like those at LinkedIn and Quora and even Facebook are enabling the sourcing of ideas from domain experts.  With the FBI/SEC’s crackdown on offline expert networks, investors will look more towards these tools for help in sourcing and validating investment ideas.
    • Transacting: Once an investor knows what action he would like to take, execution comes next.
      • Online Brokers: E*Trade, TDAmeritrade, and Schwab still dominate the online brokerage space (with recent news that Merrill Lynch is getting back into the game).  It’s interesting to watch as online brokers woo existing traditional brokerage clients with automated, professional-grade services delivered online, blurring the line between full-service and DIY investing.
      • Hybrids: Covestor and kaChing (now Wealthfront) are the eBays of investment advisory services — marketplaces of investment services.  Users synch their online brokerage accounts to mirror the portfolio models managed by advisors on these platforms.  In a move to the mainstream, Covestor’s tradestream now includes the real time audited trades from participating investment managers.  This is a big fuckin’ deal and it’s freely available through Yahoo Finance’s Market Pulse.  Newer entrants like Tech Crunch Disrupt finalist Betterment provide automated investment services.  Other investment advisors like Formula Investing provide a mixture of full service and DIY tools.
    • Managing:
      • Ongoing monitoring:  As markets undulate and investors’ financial health changes, tools help automate changes that should be made in portfolios.  A number of new professional-grade, automated tools are helping head this cause.  Firms like MarketRiders help with ongoing changes in asset allocation and services like Goalgami help address life’s incessant barrage of financial goals that need planning.
      • New asset managers: Fusing the low-cost distribution model that social media affords with new methodologies to manage funds for clients, both old and new asset managers are launching all kinds of new securities in an attempt to capture part of a huge pie.  With actively managed ETFs in the infancy and good comps for successful exits, new asset managers like GlobalX are growing AUM and positioning themselves well for future growth.
      • Analytics:  Like Google’s Urchin/Analytics acquisition, analytics are core to the effective management of any platform.  TC Tear Down star, Steve Carpenter founded and sold Cake Financial to E*Trade earlier in 2010.  Cake helped investors make more sense of the activities in their portfolios. With Cake Financial bowing out, the market is wide open.  Look to Wikinvest’s recently launched Portfolio tool to take off where Cake left off.

Why there is still a huge window of opportunity

In spite of the flurry of activity, most of these startups haven’t even begun to dent the market for financial services.  Some of these verticals are so narrow that participants need to expand horizontally  into other silos, which both incumbents and startups are racing to do.

Some firms have advanced product-based approaches, trying to build better mutual fund mousetraps and have enjoyed a modicum of success. Next-generation mutual funds, exchange traded funds (ETFs) have almost $800 billion in assets, an increase of 34% over 2009 levels, but that’s still only 7% of all invested assets in the U.S.  In spite of all the high quality content, investors still struggle with basic financial concepts, portfolio management, and continue to make bad decisions.  The flurry of activity has unleashed a bull market in financial content; We’ve gone from scarcity to too much content.  We now require tools to cut through the data smog and help us with comprehensive solutions to make better decisions.

The $11,000,000,000,000 Grand Prize goes to…

The market size of the investment industry is so big that there is room for multiple players to establish hugely profitable businesses.  Look for large incumbent players, most specifically Bloomberg, to expand their businesses through acquisition in an attempt to capture more marketshare.  Bloomberg’s multi-billion dollar empire of financial hardware and data recently purchased BusinessWeek in an attempt to move downstream toward retail investors.  The giant investment expert network, Gerson Lehrman Group, may get deeper into online expert Q&A sourcing as the firm continues to enable person-to-person expert research for professional investors.

Real-time transparency is making  its way to the online brokers.  E*Trade joined TDAmeritrade in recently announcing upgrades to its own API to allow 3rd party software developers and services to reach investors through their brokerage logins – the holy grail for the entire value chain.  Investors get access to new apps, software developers can finally tap online brokerage clients through trading platforms, and the online brokers can provide value-added services without having to develop them.

The fact that we’re beginning to seeing ivory-tower asset managers make their way onto Twitter is, in fact, a good sign of things to come in the future.  But the field is still wide open for comprehensive solutions.

photo courtesy of frankblacknoir

kaChing Pro takes next step in attracting advisor assets

kaChing continues to expand its asset advisory marketplace by broadening its offering a turn-key backoffice solution. It’s a smart move for the firm: Connecting retail investors with smaller/newer asset managers requires a broad service offering that helps some of these smaller managers with the resources required to run their businesses.

Launched as kaChing Pro, the service provides investment advisors on kaChing with

  • a custom website
  • client analytics
  • portfolio analytics
  • block allocation (allocate trades across multiple client accounts)
  • messaging

For most asset managers, the economics of the business don’t make it worth the time and money to bring on small account holders.  Beyond that, back office costs are significant and kaChing Pro should help here.  kaChing’s scale and services should obviate some of the growing pains while opening up aspiring managers to new sources of money.

Win-win with this launch and ups the ante in the race for assets and advisors for competitor, Covestor.

Read the fine print, investors: Some mutual fund fees higher than thought

We’ve written for a while that for certain purposes, Exchange Traded Funds (ETFs) are a better mousetrap.

As Mutual Funds 2.0, ETFs have introduced:mousetrap

  • new ways to implement investing ideas (eg. country exposure to Poland, Chile, etc.)
  • made existing ideas easier to trade (leveraged long and short funds, buy-write strategies)
  • provided continuous pricing (unlike Mutual Funds that price once at the end of the day)
  • more competitive management fee structure (ETFs are typically passive investment tied to an index)
  • eased the tax burden (some ETFs are able to pass on very little capital gains to the investor either through legal loopholes or just low turnover of the portfolio)

Mirroring as a new investment model

What’s true of ETFs is also true for new investment models, called mirroring.  Trade mirroring allows investors to synch their online brokers with a portfolio manager’s every move.  Unlike a traditional mutual fund manager who pools assets together, newer structures have portfolio managers managing a theoretical model (3% in X, 5.5% in Y, etc.).  This model is executed in client accounts (which are typically held elsewhere).  When a portfolio manager makes a change in the portfolio, it is then mirrored in the client account.  See this example of a mirrored account that tracks Warren Buffett’s moves.

Pricing is typically competitive to similar mutual fund strategies and investors pay a management fee + some fee whenever a trade is executed in their accounts.  Because assets are held in the investor’s own account and not comingled (like in mutual funds), the investor never has to share in gains or losses of the fund as a whole — in fact, the investor has some leeway to practice tax loss selling as well to pair losses vs. gains.  In this sense, mirrored accounts are much more tax efficient when compared to mutual funds.

Brokers have sold these types of accounts for years, called Separately Managed Accounts (SMAs), where investors could get access to some of the world’s best asset managers with just a fraction of the assets typically required to access these managers.  Now, we’re seeing the same models rolled out to do-it-yourself (DIY) investors.

It’s these last 2 benefits of newer investment vehicles – lower management fees and softer tax burden — that’s become an interesting bone of contention in the ongoing tug-of-war between the mutual fund industry and new emerging types of asset managers (including, but not only, ETFs).

Disagreement over *real* pricing

kaChing, an expert investing community which allows investors to invest alongside rising-star portfolio managers, recently introduced its own analysis (along with help from Lipper), that shows the average fees charged by mutual funds are much higher than investors typically realize — averaging over 3%.

In an article last week on the Wall Street Journal entitled “Mutual Fund Fee Debate Heats Up” (sub required), Ian Salisbury compares kaChing’s findings to those of the mouthpiece of the mutual fund industry, the Investment Company Institute (ICI).  As the WSJ reports that the ICI’s tally of the average fees charged on mutual funds hovered just over 1%.

So which is it — >3% or >1?  Clearly the answer is very important for investors.  Why? Because investing is a simple formula:

Net investment returns = Gross investment returns – taxes – fees

Given that higher taxes eat away at any return we get, lowering taxes is extremely important.  If kaChing’s numbers are correct, there’s no way the average mutual fund can even come close to beating the markets.

Couple of caveats to think about here:

  • We’re dealing with averages here:  If the average mutual fund (with 60% turnover per year, as per the ICI’s 2008 Factbook) passes through such a high tax burden to its investors loses versus index funds, that’s not to say that certain funds do charge less and return more.  Let’s not throw the entire mutual fund baby out with the fee bathwater.
  • kaChing’s execution costs for high turnover portfolios: kaChing will be producing a side-by-side analysis of their typical costs vs. those of the average mutual fund in the upcoming moths.  While kaChing (and competitor, Covestor) may indeed have lower management fees and be a lot more tax sensitive for investors, their execution costs (typically $.02/share) will eat up gains.  High volume turnover will still eat into profits.  Investors will continue to pay for professional portfolio management.
  • Transparency typically benefits the investor: It’s hard to tell exactly what mutual funds charge their investors.  Consequently, firms like kaChing are competing head-on with mutual funds and appealing to average investors by attacking the industry’s Achilles Heel: transparency.  They are banking that, as social media’s Facebook and Twitter phenomena have created new levels of visibility, so too investors will demand it in the financial industry.
  • Fees are important but not the only factor: Too many times investors will forgo professional management because they feel the fees are too high.  While that may be relatively true, there are other factors on which an appropriate investment must be sized up (risk-weighted returns is a huge one for individual investors to better understand).  Everyone on all sides of the aisle is trying to sell you something — caveat emptor.  There are no free lunches.

Anyway, check out the kaChing analysis, read what the WSJ had to say, and I’d be interested to hear your feedback.