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5 investment industry trends behind launch of new IPOs

I like high-level ideas, especially ones that look at industry trends.  One of the best sources of these ideas for investors requires going directly to recent/upcoming IPO filings (S-1) at the SEC website. Companies write this stuff themselves to raise money — who should know Wall Street Panorama, Tradestreaming viewor understand better about an industry than the market participants?

So, the recent float of asset management technology/network firm, Envestnet (NYSE:ENV) should tell us a lot about what’s going on in the investment management industry and the companies that service it.  Envestnet’s pre-IPO filings have great information.

Additionally, recent financial services/technology IPOs like SS&C ($SSNC), Financial Engines ($FNGN) and Green Dot ($GDOT) have all traded up more than 10% since their IPOs.

Here’s are the 5 wealth management trends Envestnet says is driving its business:

  1. Increased prevalence of independent financial advisors. percentage of financial advisors have elected to leave large financial institutions and start their own financial advisory practices or move to smaller, more independent firms. We believe this trend was accelerated in the past two to three years as a result of the reputational harm suffered by several of the largest financial institutions during the recent financial crisis. In particular, according to Cerulli Associates, an estimated 44% of financial advisors were considered independent in 2009, compared to 41% as of 2005, and Cerulli Associates projects that 50% of financial advisors will be independent by the end of 2012.
  2. Increased reliance on technology among independent financial advisors. In order to compete effectively in the marketplace, independent financial advisors are increasingly relying on technology service providers to help them provide comparable services cost effectively and efficiently, according to Cerulli Associates. For example, an advanced platform technology with fully integrated tools helps reduce the need for the manual processing of data and the use of multiple incompatible technology applications, allowing financial advisors to spend more time interfacing with their clients, while also potentially allowing the financial advisor to reduce technology-related costs.
  3. Increased use of financial advisors. We believe that the recent significant volatility and increasing complexity in securities markets has resulted in increased investor interest in receiving professional financial advisory services. According to Cerulli Associates, the percentage of households investing through a financial advisor increased from 50% to 58% from August 2008 to June 2009.
  4. Increased use of fee-based investment solutions. In order for financial advisors to effectively manage their clients’ assets, we believe they are seeking account types that offer the flexibility to choose among the widest range of investment solutions. Financial advisors typically charge their clients fees for these types of flexible accounts based on a percentage of assets rather than on a commission or other basis. According to Cerulli Associates, the percentage of commission-only financial advisors declined from 18% in 2003 to 12% in 2008. We believe that financial advisors will increasingly require a sophisticated technology platform to support their ability to address their clients’ needs.
  5. More stringent standards applicable to financial advisors. In light of the economic crisis and related securities market volatility in 2008 and 2009, we believe that there will be increased attention on investor consumer protection, whether as a result of regulatory changes, voluntary industry initiatives or competitive dynamics. Increased scrutiny of financial advisors to ensure compliance with current laws, coupled with the possibility of new laws focused on a fiduciary standard, may require changes to the way financial advisors offer advice. In order to adapt to these changes, we believe that financial advisors will benefit from utilizing a technology platform, such as ours, that allows them to address their clients’ wealth management needs, manage and memorialize decisions made throughout the process, and that assists them with recordkeeping and account monitoring.

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The real-time web and its impact on investing (Future of Investing)

This post was originally included as part of an ebook that I published alongside the launch of my book, Tradestream, entitled “Tradestreaming and the Future of Investing”.  The content was so good I wanted everyone to have access to it :-).

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The rise of independent publishers through blogging tools such as WordPress has been profound for the investor community.  With the integration of RSSCloud, PuSH, Twitter, and Facebook — blogs are now part of the real-time stream and are playing an ever large role in the day-to-day of the investors. I’ve seen firsthand two major trends that were previously unthinkable and nearly impossible to pull off. The first is the micro specialist blogger who focuses on a very niche topic — perhaps a single stock or a single bucket of previously uncovered equities.  The exposure and insight from these publishers has provided a key data point to investors, and provides content on topics that are not covered by analysts and the MSM financial publications.

The second major trend has been the inclusion of bloggers covering seemingly non-financial content, but who are in fact informing investors with their coverage.  This trend includes fashion bloggers who impact investors covering retail, and local political bloggers who cover topics which impact energy markets, currency trading, and the like.

Raanan Bar-Cohen has over 15 years experience as an entrepreneur and innovator in the digital media space.  Raanan currently serves as Vice President of Media Services at Automattic, which leads the WordPress Open Source publishing project and runs a number of online services including WordPress.com, Akismet, Gravatar, IntenseDebate, and PollDaddy.
Raanan blogs often @ https://raanan.com and can be followed @ https://twitter.com/raanan

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Insider buying trends (SINLetter.com)

Asif Suria has done great work over the past couple of years.  Check out what he does at SINLetter.com.

He publishes an Insider Weekend which runs down insider buying/selling trends (a Tradestreaming hallmark) and highlights specific names that are seeing significant insider activity.  Here’s the current installment.

Insider buying rebounded last week with insiders purchasing $13.42 million of their stock last week when compared to just $3.4 million in the week prior. Selling picked up pace with insiders selling $498.22 million worth of stock.

Suria compares buy/sell ratios to previous weeks’ activity:

The Sell/Buy ratio this week compares favorably with the week prior when the ratio stood at 98.64 (51.13 without the AutoZone sales).

On the notable buy/sell side, Suria calls out activity in Blackrock (BLK) and Eagle Bancorp (EGBN) among others.  Check it out.

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How to make Betterment better (Hint: truth in marketing)

Sometimes, it’s worth reading the fine print — especially, when it comes to financial products.

I was interviewed by Mint.com recently about my thoughts on Betterment, a startup that performed pretty well at recent tech conference, TechCrunch Disrupt (see, Betterment wants to be your new, higher-yield savings account).

What is Betterment?

Well, it’s really an investment advisory service that masquerades as being a better savings account.  By removing much of the jargon (the site doesn’t even mention securities by name), Betterment removes many of the barriers to putting money in the market.  As I said in the Mint interview:

For most people, opening an online trading account and figuring out what to buy and who to listen to, there’s so much noise out there.

And that’s true: how many individuals really understand asset allocation, diversification, risk when professionals have such a hard time defining them?  It’s kind of like I know it when I see it.  Betterment provides a usability layer that requires only one decision point: what percentage of my money do I want in the market?  That’s it.

Removing the confusing jargon and the pain points associated with complicated concepts is ultimately a good thing.  I can just picture my grandparents trying to navigate an E*Trade account trading screen.

Oops, it’s not actually a bank account

While pursuing a noble end (making investing easier for the mass majority), Betterment stumbles when it positions itself as an alternative to a savings account.  It is most definitely NOT a savings account.  Money in Betterment is split between Exchange Traded Funds (ETFs), one of which will include U.S. Treasury Bonds if you allocated to that.  That means, an account holder

  • risks losing some, if not all, his money
  • will see fluctuations in the account
  • will have investment-level taxes on gains

I was quoted in the interview:

“They took a process that’s inherently scary and overwhelming for people and used technology to simplify it,” says Miller. “I think that’s an honorable thing. But to market it again and again, to talk about a savings account, is just disreputable. It’s scary, actually.”

Though it appears that they’ve toned it down recently, there’s still just too much talk/discussion on the Betterment website about safety and savings.  Betterment may be a great product to *invest* spare cash just sitting in a savings account (much like ShareBuilder used to be).

Just don’t compare it to the savings account.  At 90 basis points (.9%), it’s also expensive.

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Source

A Better Savings Account? (Mint.com Blog)

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Will Merrill Lynch’s new online brokerage offering make a difference?

There’s been a lot of speculation about what or what not Merrill Lynch (now owned by Bank of United States of America) intends to do with its re-launch of Edge, Merrill’s online brokerage offering.  Here’s a quick summary of what was punted around post-announcement:

  • MorganStanley: We do not view Bank of America/Merrill Lynch’s new online brokerage product, Merrill Edge, as a serious competitor near to medium-term to Schwab and TD Ameritrade. Bank of America and Wells Fargo/Wachovia have had online brokerage products for some time and they haven’t impacted TD Ameritrade and Schwab’s ability to grow assets – clients choose to use one product over another and don’t easily switch. — Analyst, Celeste Mellet-Brown
  • FBR Capital Markets: Bank of America will need to invest hundreds of millions in technology, customer support, and branding to truly compete for new customer assets. — Analyst, Matt Snowling
  • Raymond James: It’s “highly unlikely” that Merrill Edge will cause a significant number of existing clients to leave Schwab, TD Ameritrade or E*Trade. We believe this is simply a re-branding of Bank of America’s existing online brokerage .– Analyst, Patrick O’Shaughnessy
  • RIABiz: Such access could take the form of a team of advisors who handle inquiries up to some form of a hand-off plan where customers being handled by call centers could get referred to a full-service broker as their assets grow and their needs for advice become more sophisticated. In this hand-off endeavor, Merrill Lynch could have – in one respect – an edge over Fidelity, TD and Schwab, which have been successfully handing off billion of dollars of assets from their branches to RIAs for several years.
  • Registered Rep: The idea is to convince current clients to give them the “play” money they have parked at the discounters, which can amount to substantial sums, and to capture the hearts and minds of young people who have yet to amass their wealth. We’re talking serious dollars here. At stake is a coming intergenerational transfer of wealth—the evolving wealth of today’s 87 million-strong, 20-something “millennial” population, born between 1979 and 1999. This wealth is projected to grow from $172 billion today to a staggering $13.4 trillion in investable assets (liabilities reaching a shocking $16.2 trillion) by 2030, according to internal Merrill research.

My Take

All of the reasons that Merrill Edge shouldn’t work (technology and service investments, channel conflict with Merrill’s financial advisors, incumbent leadership) are valid. Merrill’s 15,000 member strong advisory unit is/was a driving force for the firm and many of them view this launch as a threat to their core businesses.

But here’s the thing: I’ve written repeatedly that wealthy and soon-to-be-wealthy investors employ a combination of full-service and do-it-yourself investment tools.  In fact, many of the brokerages are courting these types of investors with automated, professional-grade services, like E*Trade’s Online Advisor.  As the future unfurls, these types of investors will continue to use tools and services that satiate the comfort of control and the need for professional advice.  Merrill Edge plays right into this.

This isn’t about getting a $25k minimum account and praying the account holder brings more.  It’s a foothold, but it’s also a way to hold onto wealthy clients with a lot more money under management as they oscillate moving their funds in into and out of semi self-directed tools and professional money managers.  Edge gives that money one home.

Additional Resources

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Inching towards an investing app store

Service and product providers in the financial field have always lamented how hard it was to reach investors.

Sure, we could market to the investing public in a large, splashy way but it would be so awesome if we could just do a deal with the online brokers and offer our services through an investment account login…

I know this sentiment well.  When I was running business development at Seeking Alpha a few years back, it was so clear that the best/easiest/cheapest way to reach investors with our content was directly through the likes of E*Trade ($ETFC), Schwab ($SCHW), and TDAmeritrade ($AMTD).

This hasn’t been completely lost on the incumbent online brokers (but boy, do they move slowly!).  I’ve riffed previously on how everything is moving towards the creation of investment app stores.  Much like Apple’s famed AppStore, 3rd party service providers would be able to develop their services and products for delivery through the brokerage platform.  TDAmeritrade has a short, but growing  list of providers who are currently doing this here.

The investment app store concept is huge and extremely valuable for everyone in the value chain:

  • Investors: Online brokerage clients no longer have to wait for the walled-garden brokers to develop their own tools and services.  Brokerages are notoriously slow in rolling out new functionality or they typically acquire it (a-la TDAmeritrade’s purchase of ThinkorSwim).
  • Brokers: No need to swell the ranks of the product dev teams.  Now, they just have to manage the API and partnerships and they get a new revenue stream.  Sweet.
  • 3rd party solutions: Wham, investment newsletters, black box trading strategies, content aggregators and others have just been invited to the party.  You can know actually technically reach the end user investor.  Don’t expect the brokerages to promote you though 🙂

So, just like the tit-for-tat we’ve witnessed for years, we shouldn’t be surprised to see that E*Trade just announced the introduction of its API and partnerships with three external firms.

“Open API presents a world of opportunity to customers looking for a more customized investing experience and to software developers looking to create the next great investing app,” said Michael Curcio, President, E*TRADE Securities. “Our main objective is to facilitate innovation and ideas that empower customers — ultimately creating a richer investing experience.”

Source: E*Trade Bolsters Trading Innovation with Open Application Programming Interface (MarketWatch)

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Resources about stock buybacks

Stock buybacks, whether you like them or loathe them, are a reality and when companies are sitting on so much cash (like they are now – almost $1 trillion!), buybacks are certainly one option for companies looking to deploy their cash hordes.

Barron’s recently reviewed a few online resources to help investors stay on top of macro and company-specific trends.  You should read the whole article (sub. required).

Here are a couple of their ideas and some of my own thrown in to boot…

Stock buyback resources

  • S&P Indices Market Attributes Series — I’m not exactly sure of what that means but this page posts proprietary S&P reports into buybacks.  Good overview on their reports (like this one (.pdf))
  • The Online Investor: OLI does a good job of reporting all the buybacks in the market on a per-company basis.
  • StreetInsider: Ongoing free feed of stock repurchases at numerous U.S. traded companies.
  • Seeking Alpha transcript search: Seeking Alpha publishes thousands of free conference call transcripts.  Search for terms like “stock buybacks” or “share repurchases” and get a list of which companies are talking about them and what they’re saying.

Academic studies of share buybacks

Premium Newsletters using Share Repurchase Strategies

Funds using buyback strategies

  • PowerShares Buyback Achievers Portfolio ETF (PKW)

Read the whole Barron’s article here (sub req’d).

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New tactical ETF products coming to market

new tactical etfs launchingBit late to this, but Kudos to Mebane Faber and Cambria Investments for beginning the launch phase of new tactical ETFs with AdvisorShares.

From the press release:

AdvisorShares Investments, LLC, a developer of and investment adviser to actively managed Exchange Traded Funds, announced today a partnership with Cambria Investment Management, Inc., a Los Angeles based investment manager, to create a GTAA strategy in an actively managed ETF. The proposed ETF would join AdvisorShares‘ growing stable of innovative actively managed ETFs

Meb Faber is author of the Ivy Portfolio and the portfolio manager of Cambria Investment Management.  His paper, A Quantitative Approach to Tactical Asset Allocation, has been dowloaded over 50,000 times and is one of the top 5 most downloaded papers on the SSRN.  These ETFs seem to productize many of the concepts Faber has built in his research.

Source: AdvisorShares Announces Partnership with Cambria Investment Management to Develop a Global Tactical Asset Allocation (GTAA) – Marketwire

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What is Tradestreaming: Screening 2.0

Top investment gurus like Benjamin Graham, Warren Buffett, Peter Lynch, and Joel Greenblatt didn’t only help investors enjoy huge market-beating returns in their funds.  They also left behind the keys to the (investing) castle: the methodologies they applied in their market-trouncing performance.  They’ve written books, complete with formulas and strategies, that propelled them to the top of their games and gains.  Tradestreaming aims to recreate these strategies as we pave our own way to outperformance.

Because a small number of expert investors wrote extensively about their investing techniques, we can now create complicated computer programs to reenact their strategies and apply them to today’s stock markets.  Screening 2.0 is all about using smart technology to bring history’s best investors back to life.

Technology-driven investing

Stock screens have been around for decades.  Using screens, we can filter through thousands of investment candidates on the prowl for the ideal investment.  Old screens merely searched databases of stocks using specific criteria (i.e. all large cap stocks with a p/e less than 20 and a growth rate over 7%). Unfortunately, for most investors, these screens fail — searching for specific stocks tells us nothing about the success of such a strategy.

Screening 2.0, lead by analysis and money management firm, Validea, allows us to recreate history’s best investment strategies, computerize them, and then look for stocks that guru investors like Ken Fisher and Marty Zweig would have purchased themselves.  Screening 2.0 is the marriage of search technologies and artificial intelligence with quantitative investing.

More Resources

Make sure you check out the Tradestreaming for the Internet’s best stock screening resources.

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