Cheap investment advice
The biggest threat to incumbents, however, comes from outside the traditional banking sector, where hungry innovators are trying to cut the cost of investment advice and wealth management drastically. The most fertile ground for many of these new firms is in California, where a generation of technology entrepreneurs that made its money online is preparing to invest it online too. The region is already awash with traditional wealth managers. UBS, Goldman Sachs, JPMorgan and others are expanding in San Francisco and around Silicon Valley. They have recently been joined by online rivals such as Wealthfront, MarketRiders and Personal Capital, all of which use technology to help clients build customised asset portfolios at a small fraction of what traditional wealth managers would charge.
The biggest threat to incumbents comes from outside the banking sector, where hungry innovators are trying to cut the cost of wealth management.
Wealthfront, which is aiming its offering squarely at Silicon Valley's new rich, will manage money for a fee of 0.25% a year, using sophisticated algorithms that measure risk tolerance and build a diversified portfolio. Another new entrant is Personal Capital, started by Bill Harris, a former chief executive of PayPal and Intuit. It tries to straddle the world between cheap online wealth management and the old world of private banking. Customers can sign up online but the firm provides expert portfolio and tax-management advice and assigns wealth managers to individual customers. In Britain a firm called DCisions has crunched the data on millions of portfolios to obtain risk-adjusted returns as benchmarks for new investors. The data show up clearly how wealth managers' fees have affected the value of the portfolios and what difference the managers' advice has made.
Tom Blaisdell, a partner at DCM, a venture fund, manages his savings through MarketRiders. For a flat fee of $14.95 a month the firm assesses his tolerance for investment risk and helps him construct a portfolio of investments using exchange-traded funds that he can buy through any discount broker. The firm monitors his asset allocation as markets move and sends him quarterly instructions on what to buy or sell to rebalance his portfolio. "I've got a personal rant on this but 90% of what people call 'investing' in this country is what I call 'gambling'," says Mr Blaisdell. "It is a big area for innovation."