Investing Democratization…Actually, Not So Much…

This post is prompted by Robin Hood recently closing a successful $13M in funding and Lending Club’s imminent IPO.

Picture Credit: Unknown

I really like the direction that consumer financial technology companies are moving towards, I really do. Their mission to make investing and wealth management accessible to the laymen, the overwhelmed, and the “can’t be bothered” through new technology/platforms with much less complexity is noble. However, despite creating platforms that are relatively easy to use and comprehend, there are many unanswered questions and as to how the platforms actually work and how the fee structures actually work. I mean these companies do have to make money as “there’s no such thing as a free lunch” and “it’s not a charity, it’s a business”.

Typical online discount brokers will charge you anywhere from a few dollars to over $10 depending on the size of your basic buy and sell trade, but will quickly escalate with more advanced types of trades. This is focused on basic retail trading so let’s compare:

Betterment – Goal based investing with automation and passive investing

Management Fees: <$10k (0.35%), $10k — $100k (0.25%), $100k — ???(0.15%)

FutureAdvisor – Aggregates investments from multiple sources and optimizes your portfolio

Management Fees: 0.5%

Motif Investing – motifs are constructed of up to 30 different stocks, users can construct motifs and if enough people invest in them and the motif does well you can make additional money

Trading Fees. $9.95 for up to 30 stock in each motif

Personal Capital – automated rebalancing portfolio that has access to financial institutions as well as brokerages

Management Fees: <$1m (0.89%), $3m (0.79%), <$5m (0.69%), $5m+ (0.59%), $10m+ (0.49%)

ETF Fees: 0.1%-0.2%

SigFig – Originally started similar to a Mint.com to track investments but has recently introduced an automated investing system

Managment Fees: $10 a month

ETF Fees: 0.15%

Wealthfront – the success story and the poster child of the movement since they were able to raise over $1 Billion dollars in such a short period of time and continues to blossom with their new offering as Wealthfront for the Workplace.

Management Fees: <$10k (none), $10k+ (0.25%)

ETF fees: 0.15%

Covestor – connects you with the trades of money managers that have been vetted and approved by covestor

Management Fees: single fees for assets in account + 0%-2% management fees

Trading fees: $1 per 100 shares or less

Robin Hood – promises commission-free trades and no account minimum but there is always a catch or catches: They charge for access to their API if you want to test your chops in algorithmic trading, and charge higher for trading on margin, and some suspect their bid ask spreads are not as tight as competitors

With a platform such as Interactive Brokers you can build on the API for free and at 1 cent per share of $1 for 100 shares or less and choose which exchange to route your order through

Lending Club – a company that allows for retail investors to take on outstanding debt which theoretically allows for lower interest rates and accessibility to loans

All the new consumer fin-tech startups are clearly causing a stir as some incumbents have quietly created new offerings to directly compete:

· E*Trade – April 2014 launched their “Build Your Own Portfolio” a.k.a “Online Portfolio Advisors”

· Vanguard — April 2013 Invite select clients to their “Personal Advisor Services” with an official roll out in April 2014 to new clients with a $100k minimum with future plans to lower the minimum to $50k

· Charles Schwab – July 2014 announcement that they are working on a “groundbreaking online advice” platform

As you can tell even though I put all the information on one page, it is still difficult to figure out which one is the best for you and your financial situation.

I think these startups are going in the right direction and are shaking up long stagnant retail financial services, but there is still a long way to go as the cost and fee structures that are associated with each platform are still nebulous and require a decent-sized appetite for research, but is that not what these platforms are supposed to mitigate and supposed to take care of for you?

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