Portfolio management – the online revolution

Tech companies are driving changes in wealth management, so where does this leave banks?

Anew breed of financial technology (FinTech) startup has set its sights on wealth management, and is rapidly gaining in popularity.

Once the sole province of banks and private advisors, portfolio management has seen a whole host of new competitors – some known as robo-advisors – including Wealthfront, SigFig, Personal Capital, FutureAdvisor, Betterment.

In just four years, Betterment, for example, has grown to serve over 50,000 customers and holds more than USD1 billion under management.

Many of the new startups are aimed at the younger generations. Wealthfront estimates that so-called Millennials (individuals born from 1980 to the early 2000s) in the US control about USD2 trillion of liquid assets today, expected to balloon to USD7 trillion by the end of the decade.

Other industry observers say that as the wealth is transferred from the boomer generation (individuals born from 1946 to 1964) to generations X and Y, it will represent a USD41 trillion opportunity.

On the back end, technology startups such as Addepar, MyVest, and Kensho are providing platforms that increase efficiency by offering continuous access to intelligence on global economic trends.

Personal Capital, a California-based financial management website offers panoply of personal finance apps and is used by over 600,000 people to budget and invest more than USD100 billion of their money.

San Francisco-based MyVest provides the technology that performs automated ongoing rebalancing/portfolio optimisation on all of a client’s accounts. This holistic software engine is also available as a powerful back end that readily integrates with a wealth management platform/system/workflow.


Using Big Data

Data visualisation is the underpinning for Addepar, founded by Joe Lonsdale, who also co-founded high profile Big Data startup Palantir. Unlike the two-dimensional approach of an Excel spreadsheet, the Addepar dashboard gives the wealth manager the power to visualise any number of potential scenarios with a click of a mouse.

“It’s a spreadsheet on steroids,” says James Carney, president and chief executive officer of ByAllAccounts, a company that provides account data aggregation for professional wealth managers and financial advisors.

Big Data analytics give financial institutions an edge when combined with global economic trends. Massachusetts-based Kensho is built around an intelligent engine it calls ‘Warren’.

Kensho says Warren can be queried in plain English, summoning data-rich answers to questions such as: ‘What happens to the share prices of energy companies when oil trades above USD100 a barrel and political unrest has recently occurred in the Middle East?’

Warren puts data disposition into the hands of financial managers at all levels – rather than just a select group of the most powerful. Its democratising influence could disrupt the investment ecosystem as it now stands.


Access for all

The new wealth management startups are throwing open the curtain and promising transparency in how investments are managed and rebalanced. For example, SigFig charges a flat fee of USD10 a month and trades are free if the user keeps their money at Fidelity, Schwab or TD Ameritrade.

Betterment charges 0.15-0.35 per cent of assets, and Wealthfront is free for the first USD10,000, with a charge of just 0.25 per cent after that. Covestor, a service that gives customers a chance to follow portfolio managers and invest exactly as they do, offers some transactions at no cost and others for low flat fees.

Meanwhile, banks and wealth management companies are working to keep up. There are numerous ways in which banks can make use of the technology that is being developed.

eToro, a popular international social trading and investment marketplace offers banks and other financial institutions a white-label version of their service, while MyVest, Addepar, and Kensho provide the kind of back end support that most banks currently lack.

Overall, banks can benefit from the algorithm-based portfolio analytics, innovative interfaces and new approaches being developed by the FinTech startups.

The emerging wealth management companies hold strong appeal for today’s mobile-enabled, demanding and busy customers, and many of them are eager to work with banks to license or otherwise serve up their leading-edge technology.