Wealthfront’s Portfolio Review tool – good for young investors, but account aggregation a missed opportunity

Will Trout

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Feb 8th, 2016

Wealthfront PR 2

It’s heartening when, in an industry often criticized for its rapacity, a firm tries to do right by its investors. By launching its Portfolio Review Tool, Wealthfront is building on the white hat reputation it earned when it rolled out an asset allocation service for free back in 2012.

As I promised in a previous post, I decided I would use the tool to take my personal portfolio of roughly a dozen low cost ETFs for a test run.

I found the above dashboard that popped up (after I logged into to my brokerage account through the Wealthfront portal) to be of modest value to me. I don’t pay much in fees (the most I fork out for an ETF is 30 bps for a dividend growth fund), and I’m unclear as to how Wealthfront can do me better. That said, I think Portfolio Review is a useful tool for investors trying to build a portfolio, given the six figure impact that excessive fees can have on a portfolio over a lifetime. And for an investor who has had the time to build up assets, tax loss harvesting and avoiding cash drag makes a lot of sense.

Helpful, just not the big picture

The flag on the diversification column represents the biggest bone I have to pick with Portfolio Review, although this is an issue I see not only with Wealthfront, but many other robo-advisors generally. The specific problem is the lack of an asset aggregation tool. Unlike those provided by Jemstep and FutureAdvisor, Wealthfront asset allocation recommendations do not take into account assets held elsewhere. This can result in incongruous portfolio outcomes for those clients (a large minority, I suspect) who keep just a small percentage of their holdings at Wealthfront. In my case, to get an asset allocation even roughly in tune with my overall investment thinking, I had to answer Wealthfront profiling questions in a way that exaggerated my tolerance for risk.

In that light, it strikes me as curious that (having removed the blinders to assets held elsewhere) Wealthfront would apply the same insular perspective to non Wealthfront accounts. What if I hold accounts with multiple brokerages and/or custodians? The Portfolio Review tool can’t tell me if I’m diversified or not.

Now, I like Wealthfront and I realize that account aggregation may not be a big lure for their target clients, many of whom are young investors just building their nest eggs.

But surely Wealthfront would like to attract tech savvy Gen X’ers like me?

Hmm… Maybe the solution to the diversification challenge posed by Portfolio Review is to move all my assets to Wealthfront. Or is that perhaps the objective?

Behind the launch of the Wealthfront Portfolio Review tool

Will Trout

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Jan 22nd, 2016

Wealthfront PR

Free advice is poor bait. Just ask SigFig and FutureAdvisor, who rolled out free portfolio analysis tools as a way to hook what proved to be very elusive fish. Indeed, the high cost of retail customer acquisition convinced these B2C robo advisors to embrace B2B (and BlackRock, in the case of FutureAdvisor).

Wealthfront, which remains committed to the B2C model, unveiled its own portfolio analysis tool last week. The objective is to wear the white hat as much as to haul in assets. Spokeswoman Kate Wauck describes the introduction of Portfolio Review as “another milestone in our history of delivering services that actually benefit the investor.”

The implication, of course, is that the rest of the industry falls short. According to Wealthfront, 92% of the portfolios it reviewed in setting up its Portfolio Review tool were hamstrung by some combination of high fees, cash drag and insufficient diversification.

I decided to put my own personal portfolio of roughly a dozen low cost ETFs to the test. It was easy enough. After selecting my brokerage firm (see image at top of post) and logging on via the Wealthfront portal…

I’ll share the results in my next post. In the meantime, a couple observations on strategy:

  • Wealthfront, which (unlike FutureAdvisor and other robos using aggregation tools) makes allocation recommendations solely based on assets in house, is pulling off the blinders. Peering into competitor platforms and showing why they don’t work suggests a shift in thinking and a renewed assertiveness from idol smasher Adam Nash.
  • Here we see the power of proprietary data. While clients were comfortably sleeping, Wealthfront algorithms were crunching portfolio performance numbers. Although a touch presumptuous (by opening an account, did I give Wealthfront permission to review my investing history?), Portfolio Review serves as a nice demo of software engineering, as well as a freebie for the investor.

As always, in addition to altruism, there are some hard-nosed calculations at work. The launch of this tool speaks to the increasing competiveness of the robo-advisory business, and for Wealthfront, underscores the urgency of bringing in new assets, particularly in the current market environment.

Digital Asset Holdings, R3 emerging as Blockchain leaders in capital markets

Brad Baliey

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Jan 21st, 2016

The news from this morning about R3 testing a trading system with eleven firms (Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit and Wells Fargo) on  Ethereum blockchain fabric hosted by Microsoft Azure was enough to discuss. Now Digital Asset Holding (DAH) has announced that it has raised US$50 million from thirteen capital market players, which can only be eclipsed by the announcement that ASX will engage DAH to build a distributed ledger solution for the Australian equity market. That was just today! Add in the announcement from Nasdaq with Chain around primary issuance of private equity securities at the start of the year and 2016 is turning into an exciting year for distributed ledger and blockchain applications in the capital markets.


The ASX news is fascinating and speaks to the rapid exploration of the distributed ledger space- according to the announcement:


“In February 2015, ASX announced that it would replace or upgrade all of its main trading and post-trade platforms. Phase 1 of the program runs to the end of 2016 and will replace ASX’s existing trading and risk management systems.

Phase 2 focuses on ASX’s post-trade services, including clearing and settlement of the cash equities market. The system that currently provides the clearing and settlement services to the Australian equity market is known as CHESS (Clearing House Electronic Sub-register System).”


ASX hopes to achieve the call of leveraging a distributed ledger fabric to: reduce costs, latency, errors and minimize capital requirements.


ASX was one of the thirteen firms mentioned in the DAH capital raise. The other firms are: ABN AMRO, Accenture, BNP Paribas, Broadridge Financial Solutions, Inc., Citi, CME Ventures, Deutsche Börse Group, ICAP, J.P. Morgan, Santander InnoVentures, The Depository Trust & Clearing Corporation (DTCC) and The PNC Financial Services Group, Inc.


The current distributed ledger and blockchain environment is yielding interesting cross-pollination of competitors and vendors, with many firms active in multiple initiatives.


Celent will be among the firms that speaking at The Blockchain Conference on February 10 in San Francisco—there will be a lot to talk about!!!

The time is now for bank brokerage

Will Trout

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Jan 15th, 2016

happy businessman and money on a white background. vector. flat illustration

As a follow up to my last post, I want to provide a little context on the challenges facing bank brokerages.

Banks and their brokerage arms represent a wild card in terms of the adoption of automated investments platforms. Still wedded to a product push mentality, they could benefit greatly by rolling out self-serve advisory options.

On both the loan and deposit side of the balance sheet, banks have broad (but rarely deep) relationships with clients, whose investment needs they serve via rival trust, advisory, and brokerage channels. Historically, brokerage has lagged other bank channels in technology and service terms. Automated advisory (or robo) platforms offer an opportunity to escape this defensive posture and give bank and nonbank clients a reason to bring assets into the brokerage.

A robo advisory offer also represents a forward-looking investment in infrastructure. An online advisory platform may neatly substitute for a burdensome legacy RIA, or serve as a template for creating a more customer-centric investments platform that integrates trust and brokerage functions.

At a minimum, implementation of an automated investments platform should help reduce overhead, drive fee income, and serve as a sweetener for Millennials disinclined to do business with a bank. For bank brokerages, it’s time to drop outmoded segmentation strategies and a focus on high commission products in favor of a model aligned with client interests.

Robo alert: The banks are coming!

Will Trout

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Jan 13th, 2016

robot carry money bag

Given their mass market and mass affluent orientation, banks would seem obvious candidates to deploy automated investment platforms. After all, fee income remains the holy grail for banks, and robo-led delivery represents a way around antiquated systems, channel conflict and other bank shortcomings.

Yet banks have stayed on the sidelines to date. Several rumored bank robo tie ups (SigFig and Bank of the West; Motif Advisors and U.S. Bank) have foundered in their hype, and Trizic, the much vaunted provider of robo technology to banks, has gone silent. Indeed, the cautious mindset of US banks has allowed a Canadian institution (BMO Bank of Montreal) to introduce the first bank robo in North America.

In this context, the BBVA Compass partnership with FutureAdvisor, the BlackRock owned automated investment advisor, is significant. Note that this deal is strictly a commercial agreement, not an investment (like the one made in 2014 in Personal Capital by BBVA Ventures, the venture arm of the parent company BBVA Group). In many ways, it calls to mind the short lived alliance between Fidelity and Betterment.

Does the BBVA Group (whose chairman Francisco Gonzalez, has stated that he views the future of his bank as a software company) want to learn the robo ropes, in order to build one on its own? The bank certainly has the resources to do so. Or is this a synergy driven move like the BBVA Compass tie up with payments provider Dwolla?

Time will tell. Clearly, the bank must find way to reconcile its digital ambitions with its trust heavy wealth management operations. While adding a low cost robo option to its full service brokerage menu gives the customer more choice, plugging in FutureAdvisor is just a first step. I’ll talk about the challenges banks face in integrating automated investment platforms in my next post.

Invesco buys Jemstep: why asset managers are driving robo consolidation

Will Trout

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Jan 12th, 2016

First BlackRock buys FutureAdvisor, now Invesco snaps up Jemstep. Consolidation of the robo advisor space is heating up, with asset managers leading the way.

Why asset managers? Simply put, they are keen on improving distribution and reversing the erosion of pricing power caused by:

  • Their distance from the end consumer of their product (i.e. the retail investor), which has given them limited pricing leverage as well as something of a tin ear for investor needs
  • Brutal price competition in the ETF space itself

Note that this deal, as with the BlackRock purchase, is first and foremost a B2B play. Invesco wants to secure distribution for its flagship PowerShares product by harnessing Jemstep’s robust  onboarding and aggregation capabilities. These capabilities have been a differentiator for Jemstep in the robo space since it first targeted RIAs and brokerages via the launch of its AdvisorPro platform in 2014.

Time to Cash Out?

Jemstep’s motivations are more obvious. Despite some success in the RIA space (in part due to its partnership with portfolio reporting system provider Orion Advisor Services), the firm has been burning cash and under pressure.

Furthermore, all the hype around the B2B model (as opposed to the B2C model with its high costs of customer acquisition) cannot disguise the fact that the use of digital distribution by real life advisors is a model still untested.

Fundamental questions remain at play: Should robo function as a feeder system (i.e. a means of serving younger and less affluent clients? How does one integrate automated distribution with a value proposition centered on access to a real life advisor? Also, what happens when the client ages and accrues enough assets to merit face to face consultation. Is he likely to forswear digital channels and “graduate” to the (more expensive) real life advisor?

It will be interesting to see what Invesco paid for Jemstep. I’m guessing in the $100 million range, but it could well be less. Schwab was able to launch its own robo advisor, and Fidelity, Merrill Lynch and others plan to do the same. Invesco may have decided to buy, but momentum is on the side of “build”. That’s among the reasons why Personal Capital hasn’t found takers for its $400 million asking price.

Silicon Valley? No, Chilecon Valley

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Jan 5th, 2016

In previous blog posts regarding fintech in Latin America my position was, and remains, that one of the reasons for being behind is that it lacks of a “Silicon Valley” equivalent.

Efforts to create a fintech ecosystem, as Finnovista is doing, become a good alternative to overcome the absence of a geographical pocket of innovation. Particularly consider the market fragmentation of Latin America comprised by 19 countries, some of which have 3M inhabitants to Brazil having +200M. People in most countries may speak the same language but markets are far from being similar just for that.

Under (or against?) these circumstances, Chile is working to become Latin America’s Silicon Valley. One of its most attractive initiatives is “Start-Up Chile”, created four years ago to transform the Chilean entrepreneurial ecosystem. It began with a question: “What would happen if we could bring the best and brightest entrepreneurs from all around the globe and insert them into the local ecosystem?”

The initiative offers work visas, financial support, and an extensive network of global contacts to help build and accelerate growth of customer-validated and scalable companies that will leave a lasting impact on the Latin American ecosystem.

The idea is to make the country a focal point for innovation and entrepreneurship within the region. Start-up Chile, with only four years, is a start-up itself but it has a good starting point and great potential:

  •  Chile has demonstrated for years its entrepreneurial spirit, with Chilean companies competing successfully in various industries (air transportation, financial services, and retail, just to mention a few) and a stable economy.
  • This year two Chilean start-ups were the winners of the BBVA Open Talent in Latin America: Destacame.cl, aiming to financial inclusion by creating a credit scoring based on utility payments; and Bitnexo which enables fast, easy and low cost transfers between Asia and Latin America, using Bitcoin.

While other countries and cities in the region are working in offering support to start-ups, it seems Chile is leading the way. Hopefully this triggers some healthy competition in the region, which in the end will benefit all.

In the meantime, let’s meet at Finnosummit in Bogota – Colombia next February 16th. Join the financial institutions, consultants, tech vendors, startups and other digital ecosystem innovators, to learn how startup driven disruption and new technologies are reshaping the future of financial services in the region. Remember to use Celent’s discount code C3L3NT20% for a 20% discount on your conference ticket.


A dissenting view on the so called tech bubble

Will Trout

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Jan 4th, 2016

Much ink has been spilled predicting the end of the tech boom, most recently in The Wall Street Journal. Yet even as deal volume has tumbled, and IPOs like that of Square struggle, the valuations of Uber, Pinterest and other top privately held firms continue to rise.

In my view (and as I note in my most recent report), this bifurcation of the private market signals less the bursting of a tech bubble than the natural maturation of the technology cycle. Per the graphic below, it represents a kind of “Ivy League effect,” whereby elite institutions can command top dollar even as the overall market deflates. After all, the factors driving the growth of the private market have not gone away, nor have the cost and hassles of going public.

bifurcation priv capital

Given these factors, it stands to reason that demand for shares of Uber and other top privately held firms will continue to put structural pressure on the IPO market, at a cost to its relevance. Investors will want to cash out in many cases, but Alternative Trading Systems marketplaces such as Venovate and iCapital (as well as equity crowdfunding sites created under the JOBS Act) now offer alternative sources of capital. What does the IPO matter if the most dynamic firms opt to stay private?

The rise of private capital, disintermediation, and the advice premium

Will Trout

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Dec 15th, 2015

private capital

Five observations and a final takeaway from my latest report, Private Capital on the Rise: The UHNW, Private Securities, and the Hunt for Non-Correlated Assets.

  1. The digital revolution, the requirements of a behaviorally distinct Millennial generation of investors, and the bloating of the IPO market post crisis have driven enthusiasm for non-bank or alternative sources of capital, with private equity (and venture capital) funds at the fore.
  2. Recently, direct investment (i.e. the deployment of private capital into closely held companies) has emerged as an intriguing alternative to private equity, particularly among family offices.
  3. As per the figure above, direct investment represents the “fat middle” of the traditional funding hierarchy. It assumes the disintermediation of the private equity fund manager, and is more discreet and flexible than equity crowdfunding, which has a distinctly retail orientation.
  4. On the down side, accounting system limitations make it difficult to value and account for private holdings in any scalable way. The inability to capture pricing and position information on a regular basis presents risks and opportunity costs for the direct investor.
  5. The good news is that technology vendors are developing systems to track and reflect percentages, cash outlays, and other categories relevant to private capital investment, as opposed to systems that view the world solely through the lens of unitary shares.

To point 5 above, a takeaway: While next-generation technology will be instrumental to success in the short term, portfolio management systems with the firepower to support the market for private securities will eventually be the rule. A more level technology playing field means that competitive advantage will come less from tools or even capital and more from insight and intellectual reach. The advisor able to provide these will be able to command a premium.

A profitable future for capital market firms?

Brad Baliey

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Dec 14th, 2015

I read a study by Broadridge and Institutional Investor this weekend that contemplates the future of capital markets. The two firms worked together to create a fascinating piece entitled Restructuring for Profitability. The study collected data from 150 equity analysts on their thoughts/opinions/predictions about investment banks. I also attended a panel sponsored by Broadridge that discussed the report’s findings with senior capital market professionals.

The piece offers a very interesting perspective, through the lens of the views of an aggregated group of buyside and sellside equity analysts who spend their days assessing capital market firms. What I found especially interesting from the study was that none of the large banks globally will have RoE’s above their cost of equity capital in 2020:

  • The US was nearly there with a gap of 0.09%
  • Europe has an expected gap of 1.31%
  • Asia has an expected gap of 2.77%

The report is full of data, and some key points focused on regulation and where investment bank earnings will come from. Other findings include:

  • 61% of the analysts expect regulatory pressures on global securities firm to intensify between now and 2020. The breakdown on a regional level is even more telling with 75% believing regulation will increase in Asia, 67% expecting Europe regulation to increase and 39% expecting the US to increase. Perhaps getting Dodd-Frank and Volcker out of the way early will pay off!
  • The analysts are largely optimistic about growth rates with a uniformity of view that growth will be better to 2020 vs the 2010-2014 periods. The analysts are most optimistic about M&A/advisory services (growing at a 4.86% CAGR) and least optimistic about FICC trading growing at 0.20% CAGR.

The attempt to close the profitability gaps discussed above, according to the analysts, will come from cost-control and restructuring, rather than revenue growth or balance sheet management. This path will continue to include rationalization and disposing of business units. Moreover, the report indicates a strong belief that banks have underinvested in technology and process improvement, with analysts responding that over the last 5 years banks have not invested aggressively enough in new technology to improve efficiency (61% of the time in US and 66% of the time in Europe).

In searching for profitability and investing more aggressively in platform reengineering and technology, a fascinating point was made by a senior banking manager during the panel discussion. He stated that when banks analyze their investment in technology, they need to consider the cost of lack of clarity on necessary capital required, given the general opaqueness around actual regulatory levels, and to add a factor for potential regulatory fines, into project costing analysis to ensure that banks are properly evaluating the project economics of major technology investments.

With a realistic view toward the future of their industry, business lines, and impending regulation, senior capital market decision makers need to utilize this type of calculus to ensure they are investing in efficiency in a difficult revenue environment.