New technology driven investment management services, including Personal Capital, have collectively attracted over a billion dollars in managed assets in the last year. This is a drop in the bucket for the industry as a whole, but growth is accelerating rapidly and those who are paying attention have taken notice.
A huge business opportunity exists simply because most Americans are not investing as well as they should be. Traditional product-based approaches generate billions in profits for big financial institutions, but fail to deliver for clients. The large banks and investment firms are looked at with wary eyes and are slow to offer better solutions. It’s no surprise Silicon Valley attacked the problem.
Personal Capital offers personalized investment strategies, and also a transformative web and mobile app which helps people simplify and better control their financial life. The value proposition is transparent and it resonates. We now manage about $500 million, up over 400% from a year ago, and we expect a similar growth rate in the next 12 months. We had a 98% retention rate last year.
A different approach from another group of companies involves a new delivery of automated ETF wrap management. This group is frequently referred to “algo-advisors” or “robo-advisors” due to a lack of human interaction between client and advisor. Personal Capital is often incorrectly lumped in to this category, given we have a team of financial advisors based in San Francisco and Denver to work one-on-one with our clients.
I’d like to explain how and why we are different. But first, let’s quickly review the basic structure of both traditional advisors and algorithmic advisors.
THE DIFFERENCES BETWEEN TRADITIONAL ADVISORS AND ALGORITHMIC ADVISORS
Traditional investment advisory services come in two main forms.
1) The first is the broker model where “advisors” earn commissions based on which products their clients buy. The obvious problem is conflict of interest. Your broker is technically more of a sales person than a partner and is often heavily incentivized to recommend investments which earn him more money, not you. Personal Capital does not use the broker model.
2) The second type of advisor is the Registered Investment Advisor (RIA). As fiduciaries, RIAs are legally obligated to act in their client’s best interest, which is a major reason this structure is gaining share from brokers. RIAs typically earn fees based on a percentage of assets managed, which better aligns them with client interests. Personal Capital advisors are RIAs.
Algorithmic advisers are also RIAs, but with no human assistance.
The basic algo-advisor model starts by asking potential investors a series of questions online. Based on the responses, an algorithm suggests an asset allocation which is filled by purchasing ETFs or mutual funds. The software rebalances periodically. The main benefits are easy access to a diversified asset allocation and relatively low cost. Drawbacks include potential over-simplicity and lack of service.
Personal Capital combines the best aspects of human RIAs with technology. We are a tech-enhanced advisor who embraces being a Financial Services company and a Technology company. Our management team combines people with deep experience in both. We start with the best features of traditional RIAs and apply technology to generate additional value and efficiencies for clients. Sophisticated investment management is a major part of what we offer, but our higher goal is to provide tools and services to help people live a better financial life.
WHAT MAKES PERSONAL CAPITAL UNIQUE
• We’ve spent millions of dollars building our free Financial Dashboard. On it you can see all of your accounts in one place. It’s comprehensive – we organize data and provide insight on both your long-term and short-term money. It helps users simplify life and better control their money – and it allows us to optimally manage client assets. It is a big advantage. Over half a million people have signed up for the dashboard, and they love it – our mobile app is rated 4.5 stars on the Apple app store.
• We leverage technology to scale personalized, investment management. The Dashboard introduces us to those who could benefit from our paid wealth management service and allows us to quickly demonstrate precisely how we can improve their current portfolio. Our Investment Committee makes all portfolio decisions, but software and advisors allow us to optimally implement and customize each strategy and keep our clients on track.
• We interact with clients to meet specific needs. Thanks to technology, we can interact remotely, via phone, email and video chat. If a client is based in San Francisco or Denver, we are always happy to meet face-to-face. (Read about Kyle Ryan, Head Of Advisory Services)
ACTIVITIES PERSONAL CAPITAL PERFORMS TO SPECIFICALLY HELP CLIENTS
Asset Allocation: We use a cash flow based approach designed to give each client the best chance of achieving their retirement goals. The analysis incorporates all assets and liabilities as well as projections generated by our retirement planning tools. It is dynamic and adjusts with life and markets. It is metric based, but also capitalizes on personal interaction with an advisor. I believe our methodology represents an important step forward for the industry and is superior to other algorithm based models I have seen.
Portfolio Construction and Rebalancing: For the US equity portion of portfolios, we utilize individual stocks in a way that offers potential for higher return while simultaneously lowering risk from sector bubbles. We call this strategy Smart Indexing. For all other asset classes we use a granular blend of low cost ETFs. Software helps keep accounts on target, but rebalancing decisions are made by our Investment Committee. We strongly believe asset allocation and portfolio management are not commoditized.
Financial Planning: It’s who we are. We have a number of Certified Financial Planners™ on staff and routinely help clients with retirement planning, education planning, when to refinance a mortgage, customized stock option strategies, which funds to choose in their 401k, when to start Social Security and much more.
An Advisor When You Want (or Need) One: Life happens. So do market cycles. Investing can seem easy in the middle of a bull market. Fear and greed tend to rear their ugly heads in the midst of bear markets and the height of bull markets – that’s often when having an advisor adds the most value.
Tax Management: We manage to each client’s individual tax return, including asset location across different tax status accounts. We do tax loss harvesting, as do some robo-advisors. Tax loss harvesting can be valuable, but it can quickly become counterproductive if it is on autopilot. The use of individual stocks for the US equity portion of portfolios allows for improved tax reduction.
Custodian: Our client’s money is kept at one of the largest, most stable custodians. There are zero trade commissions, which is what allows us to effectively implement our strategies using individual securities.
I joined Personal Capital because it presented a unique opportunity to help build an investment service totally from scratch, using new technologies to provide a better solution for clients. Happily, Bill Harris (our founder, CEO and Investment Committee member) shares the same investment philosophy, with a focus on diversification and efficiency. The possibilities that come from integrating the benefits of the Financial Dashboard provide us the opportunity to meaningfully elevate how wealth management is done. More new things are in the pipeline.
As a company, we recognize different solutions are right for different people. Those getting started saving and investing may find an algo-advisor to be a low-hassle way to get diversified market exposure. It is generally better than picking active mutual funds or random stocks. Algorithmic-advisors can be a useful tool for do-it-yourself investors, similar in many ways to how Target Date Funds have already helped a lot of people.
I spend a lot of time talking with clients, working with advisors, and helping with financial planning issues. I like doing this, but I also think it makes me better at my portfolio management responsibilities. Money is personal and emotional, and I’m thrilled every time we can provide a client more peace of mind and a better chance to retire how they want to. Odds are by the end of the next market cycle, both Personal Capital and algorithmic advisors will rise up to take a much larger position in the wealth management industry. We’re excited to be part of the change taking place.
Image credit: Florence Low
Craig Birk, CFP®
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