Gurley's post [1] (from 2014) gives one possible end goal: "Learning about Yu’e Bao gave us an epiphany that Jack Ma likely had years ago. If you want to truly disrupt the financial services industry, perhaps you need to stop attacking the transactional experience and launch a competitive product on the asset gathering side. Once you have the assets, all the disruptive things that Silicon Valley types want to do will be easy. The hardest part has been getting access to the funds."
why don't Silicon Valley firms partner with existing smaller banks looking to do more with their balance sheets? seems like if their ideas are truly disruptive it would be a win-win for both parties.
Since this is a community of programmers, you might be interested in doings things like this yourself instead. There are a couple of options:
- Quantopian (http://quantopian.com/): Python based, kinda a little bit open source (backtesting only), live trades on Interactive Brokers or Robinhood. Has a big community for stocks.
- QuantConnect (http://quantconnect.com/): .NET based, more open source (includes live trading), live trades on Interactive Brokers, has a similarly sized community but the community's attention is spread to other asset types like Forex as well.
>One thing I see every once in a while on HN is people with the belief that they can spend a week or two knocking out an algorithmic trader and start raking it in. In order to break this illusion I would recommend: http://financial-math.org/http://www.quantresearch.info/
As others have pointed out, what this comment proposes is wildly different to what Wealthfront and Betterment do. Active trading, algorithmic or otherwise, is unlike buy and hold investing which Betterment and Wealthfront advise. Buy and hold is also simpler. The value-add of a robo-advisor for buy and hold is automating:
A) Keeping a portfolio balanced and
B) Taking advantage of a fairly specific set of tax loopholes in order to make those investments slightly more tax friendly. (where "slight" can become substantial over a 15+ year period of compound interest)
I know that some programmers have written code to automate their Vanguard accounts into something similar to a robo-advisor. This, to me, is much closer to programmers taking an interest in self-built robo than what the parents proposes.
Auto-rebalancing is fairly easy, you setup your account to put deposits and dividends into a money-market account then write a script which moves money from the money-market account into ETFs at the correct ratios. Tax-loss harvesting is slightly more complex but is doable.
Also don't forget about Quantiacs (https://quantiacs.com/) -- Quantiacs supports both Python and Matlab, and is focused on managed futures -- not equities. It's open source, and unlike quantopian or quantconnect -- Quantiacs actually matches your algos with institutional investors and shares the profits with you....and you retain 100% of your own IP.
This article didn't mention it specifically, but Betterment already put in a rate hike. You used to be able to get 10 basis points if you had over 100k and they just increased that to 25 in a really underhanded way. I had been using Betterment for about 2 years when they did this.
I had been happy with Betterment but it's clear that they want to get as many people in under the low rates and slowly increase it on you, knowing that you can't easily move it around to another provider (especially if you're dependent on their tax loss harvesting etc).
Yeah, that was really disappointing. I'd bought into the Betterment kool-aid, and shortly after funding my account, I saw their 'price increase buried in an unrelated product announcement' email.
I think these companies (Betterment, WealthFront, etc) are struggling with really high customer acquisition costs that take quite a while to break even on. I'm sure that not many people noticed/cared enough to transfer out (I'm doing it now, it isn't a small task), so they came out way ahead on it.
Unfortunately, I think it will be easy for them in a year or two, when they need more quick revenue, to look back and say "Hey, not many people said anything when we raised fees by 67%, what's another 10 bps or so?"
In the article, it states that Chase is offering 0% funds, yet Betterment claims that their "All-in Actual Cost" for a 100k fund is better than Chase's due to cash drag and a lower expense ratio. (Found here: https://www.betterment.com/comparison/schwab-intelligent-por...)
This is confusing and hard to fact check. Who do I believe?
I think their reasoning is sound in theory, but it strikes me as suspect that they would not allow even the option to stay fully invested for clients who would prefer to manage the cash component of their portfolio in a bank account where it can actually be spent at moments notice. And it does also strike me as a bit too convenient that their decision to remove this option from clients just happens to directly benefit Schwab's bottom line.
Their decision to compose more than half of the equity portion of their portfolio using dramatically higher-cost fundamentals ETFs from Schwab in place of using solely market cap ETFs also triggers similar warning bells for me, however sound the technical reasons for doing so might be:
https://intelligent.schwab.com/public/intelligent/insights/w...
That said, I'm curious how Betterment came up with their numbers for their cash drag analysis. If cash drag on the highest end of the spectrum of a portfolio with 30% in cash is supposed to cost investors 0.56%, I'm not sure how they derived the lowest end of a portfolio with 6% in cash to be 0.38%. It seems to me Schwab might not be the only one here guilty of misleading potential clients.
Disclaimer: I am a Schwab client, but am not actively using their Intelligent Portfolios offering. I have done a bit of research into it back when it was announced though.
Index-based robo-advisors generally invest your money in vanguard, ishares, schwab broad-market etfs, which come with their own fees (industry-lowest). The expense ratio is the accumulation of all those fees. To check the accuracy of the claim, you would need to find the specific instruments each company invests in, at what proportions, and add up their fees.
Cash drag is the penalty you pay for the time and amount of your wealth that is spent in sub-productive, inflationary cash. The article states:
"Schwab allocates up to 30% of a portfolio to cash. In certain circumstances, keeping up to 30% in uninvested cash can result in up to a 0.56% annual return penalty"
This sounds like a worst case scenario. To roughly calculate cash drag, you can take the avg percentage of wealth that will be in cash throughout the year, then multiply by 5% rule of thumb avg returns. For example if you had to keep 10% in cash, that would be 0.1 * 0.05 = 0.5% in lost potential earnings due to cash.
Wealthfront has raised ~$100M and Betterment has raised ~$200M. If they are only burning $4M/year to grow as fast as they are, they are doing fantastically well. I suspect though that the author's burn rates are off by an order of magnitude.
Yeah, he's taking salary, and a conservative salary at that, as cost to the business. The cost to the business is generally much higher, 1.5x to 2x depending on benefits. He should probably double the number he's using.
While we're on the topic of robo-advisors, I'd love to see a robo-advisor that lets clients customize a portfolio allocation and just advises them on when and what to trade to keep their portfolio balanced on a regular schedule, for a fixed fee. That is, instead of these so-called robo-advisors that are actually robo-managers, in the sense that they manage your portfolio and trade on your behalf, and are compensated as such, for a percentage of the entire value of your portfolio.
I'm sure there is enough space in the market for both types of products, the robo-advisor and the robo-manager. Personally, I'd prefer the former.
Shameless plug, but I'm actually working on a product that does exactly that. It started as a personal tool that integrated with my brokerage account to take the hassle out of rebalancing and knowing which trades to make with my monthly contributions. It currently only works with Questrade, but I'm looking at adding support for more brokerages.
Another shameless plug: I made a service like this for myself and a few friends: https://zenve.st
It actually trades on your behalf, but only to keep your portfolio balanced and to allocate any cash you deposit into the account. It works on top of Vanguard, and you can customize it to invest in any Vanguard ETFs with whatever allocation you want.
Currently, you can only sign up for the waitlist, as I don't know if people would be interested in something like this.
that's a good insight. i also tend to think advice and sales should be done by separate parties. otherwise the advice won't be independent or bias-free.
The failure of articles like this is that they take a snapshot of a company at a point in time and assume that the company's business model and reach doesn't change. This is the same mistake that many analyst make on early stage companies.
Companies evolve over time and grow in terms of scale. Take a look at Facebook and Google as an example.
LOL! This is exactly why Wall St can't make early stage investments.
Clearly these are speculative bets on Wealthfront being as large as a mutual fund. The fact that the author doesn't see this means they're overvaluing a mutual fund manager and thinking that an algorithm can't come close to matching that performance. These startups have two major cost advantages over incumbents: 1) no researchers 2) no salespeople. They have higher profitability, so they'll be better equipped to spend on sales & marketing to achieve fast growth. This leads me to think that at least one of these companies is going to grow to the size of a large mutual fund and "WIN".
I think that he's definitely right about consolidation and then acquisition.
I work in HNW wealth management and I think that there needs to be better education on what for example a young person's IRA should look like. An ideal robo-advisor would make buy recommendations, ask you to never sell, and use education along the way to help prevent you from making the same mistakes most people fall trap to. I also think that if any of these companies have a desire to stay around for a while they need to be targetting the IRAs of young, high-income programmers. With a good fee and good education and assistance they can probably retain these customers, encourage them to max out contributions into their IRA (you should!!) and slowly build up a long tail of decent-sized accounts from people that may have only been interested from a tech perspective initially.
Sorry for the naive question - but if you're contributing to a 401k, aren't you ineligible for tax-deductible contributions to an IRA?
If so, it would seem like an even better business would be getting into administering 401k plans cheaply with employers and then keeping people on the platform post-employment.
I haven't switched to a roboadvisor product for a few reasons, but one of them is that saving for retirement is a decision you make on a 30+ year timeline. Most startups hardly last 3 years, much less 30. Why would I trust my money to an industry where the typical case is a flameout in only a few years?
It's a fair concern. Both Wealthfront and Betterment are Broker dealers and they have legal obligations in the event of going out of business.
Wealthfront spells it out as:
"In the unlikely event Wealthfront were to cease doing business, your account would be held by our brokerage partner until you transferred your account to a new broker or chose to liquidate your account to receive a check."
If their companies go under, it shouldn't affect your assets- that's not part of their balance sheet. You can move then elsewhere after they flame out, and have paid only 25 bps for a few years in the meantime.
This is the same concern I had, though it's important to point out that if you had money in Betterment/Wealthfront and they went under, it would just be an inconvenience as you'd retain your investments.
WiseBanyan seems to be employing strategy (3): "Have a relatively low amount of AUM, charge low fees, and employee very few people." According to LinkedIn, WiseBanyan only seems to have 20-30 employees compared with Betterment's 200-250 and Wealthfront's 150-200.
I don't use them, but I can tell their strategy is working. My broker (through work) is Fidelity and lately they've been throwing up pop-ups on login, and sending me emails, urging me to try their low-cost funds that they insist are cheaper and better than Vanguard. They're definitely feeling the heat; I don't think companies like this push their low-fee funds on you unless they're up against the wall.
Charles Scwab does take fees in a way, their robo advisor requires a certain percentage of your account be cash. This cash in turn is invested for their own profits.
I looked into these companies but couldn't find a reason to invest through them. I don't understand what value these guys bring. If I am already paying a commission for each fund I don't know why I shypay these guys a cut again.
Eventually I think these guys will and must come up with their own funds. Else it does not make sense for them.
Why can't I buy VTI and dividend reinvest? I compared that to Betterment since 2004 and it wins handily. What am I missing? Tax loss harvesting sounds fancy but what's the actual bottom line benefit after fees?
VTI is less diversified, you basically only have US stocks. I probably wouldn't mind being only invested VTI but some people want more diversification.
I don't use a robo-advisor, but TLH saves me 6 figures in taxes every year. Sadly I'm not comfortable disclosing the size of my portfolio. It's big enough to have an account with most bankers, but not big enough to require dedicated staff. :)
I tried out these services, and it just freaks me out too much having $50,000 sitting in an iPhone app. I get that they are insured and legit, but it's just too much money for me to hand over to a startup.
Every single one of my brokerage accounts and banking accounts has an iPhone app. You probably know this, but the money doesn't actually "[sit] in the app", whatever that would mean. It is invested in stocks, bonds, mutual funds, etc -- the app simply gives you a view into where it all is and the current value. :)
lquist|9 years ago
[1]: http://abovethecrowd.com/2014/06/18/disrupting-finance-from-...
pbk1|9 years ago
_wgnp|9 years ago
- Quantopian (http://quantopian.com/): Python based, kinda a little bit open source (backtesting only), live trades on Interactive Brokers or Robinhood. Has a big community for stocks.
- QuantConnect (http://quantconnect.com/): .NET based, more open source (includes live trading), live trades on Interactive Brokers, has a similarly sized community but the community's attention is spread to other asset types like Forex as well.
Both have numerous example algorithms you can clone and run without much trouble. An example vaguely suited to investing: https://www.quantopian.com/posts/modern-portfolio-theory-min...
frgtpsswrdlame|9 years ago
>One thing I see every once in a while on HN is people with the belief that they can spend a week or two knocking out an algorithmic trader and start raking it in. In order to break this illusion I would recommend: http://financial-math.org/ http://www.quantresearch.info/
eximius|9 years ago
justincormack|9 years ago
wwalser|9 years ago
A) Keeping a portfolio balanced and
B) Taking advantage of a fairly specific set of tax loopholes in order to make those investments slightly more tax friendly. (where "slight" can become substantial over a 15+ year period of compound interest)
I know that some programmers have written code to automate their Vanguard accounts into something similar to a robo-advisor. This, to me, is much closer to programmers taking an interest in self-built robo than what the parents proposes.
Auto-rebalancing is fairly easy, you setup your account to put deposits and dividends into a money-market account then write a script which moves money from the money-market account into ETFs at the correct ratios. Tax-loss harvesting is slightly more complex but is doable.
proquant|9 years ago
fauigerzigerk|9 years ago
eeeeeeeeeeeee|9 years ago
I had been happy with Betterment but it's clear that they want to get as many people in under the low rates and slowly increase it on you, knowing that you can't easily move it around to another provider (especially if you're dependent on their tax loss harvesting etc).
suresk|9 years ago
I think these companies (Betterment, WealthFront, etc) are struggling with really high customer acquisition costs that take quite a while to break even on. I'm sure that not many people noticed/cared enough to transfer out (I'm doing it now, it isn't a small task), so they came out way ahead on it.
Unfortunately, I think it will be easy for them in a year or two, when they need more quick revenue, to look back and say "Hey, not many people said anything when we raised fees by 67%, what's another 10 bps or so?"
unknown|9 years ago
[deleted]
mfrykman|9 years ago
This is confusing and hard to fact check. Who do I believe?
lewisl9029|9 years ago
I think their reasoning is sound in theory, but it strikes me as suspect that they would not allow even the option to stay fully invested for clients who would prefer to manage the cash component of their portfolio in a bank account where it can actually be spent at moments notice. And it does also strike me as a bit too convenient that their decision to remove this option from clients just happens to directly benefit Schwab's bottom line.
Their decision to compose more than half of the equity portion of their portfolio using dramatically higher-cost fundamentals ETFs from Schwab in place of using solely market cap ETFs also triggers similar warning bells for me, however sound the technical reasons for doing so might be: https://intelligent.schwab.com/public/intelligent/insights/w...
That said, I'm curious how Betterment came up with their numbers for their cash drag analysis. If cash drag on the highest end of the spectrum of a portfolio with 30% in cash is supposed to cost investors 0.56%, I'm not sure how they derived the lowest end of a portfolio with 6% in cash to be 0.38%. It seems to me Schwab might not be the only one here guilty of misleading potential clients.
Disclaimer: I am a Schwab client, but am not actively using their Intelligent Portfolios offering. I have done a bit of research into it back when it was announced though.
toomuchtodo|9 years ago
Vanguard is a mutual company; they exist for the benefit of their users. Hard to compete against that.
Disclaimer: moved from Betterment to Vanguard
thinkloop|9 years ago
Cash drag is the penalty you pay for the time and amount of your wealth that is spent in sub-productive, inflationary cash. The article states:
"Schwab allocates up to 30% of a portfolio to cash. In certain circumstances, keeping up to 30% in uninvested cash can result in up to a 0.56% annual return penalty"
This sounds like a worst case scenario. To roughly calculate cash drag, you can take the avg percentage of wealth that will be in cash throughout the year, then multiply by 5% rule of thumb avg returns. For example if you had to keep 10% in cash, that would be 0.1 * 0.05 = 0.5% in lost potential earnings due to cash.
teej|9 years ago
hn_throwaway_99|9 years ago
sulam|9 years ago
krallja|9 years ago
lewisl9029|9 years ago
I'm sure there is enough space in the market for both types of products, the robo-advisor and the robo-manager. Personally, I'd prefer the former.
bwood|9 years ago
https://rebalancr.com/
dimva|9 years ago
It actually trades on your behalf, but only to keep your portfolio balanced and to allocate any cash you deposit into the account. It works on top of Vanguard, and you can customize it to invest in any Vanguard ETFs with whatever allocation you want.
Currently, you can only sign up for the waitlist, as I don't know if people would be interested in something like this.
Spooky23|9 years ago
You answer their questions or pick a portfolio and they update a report monthly that will tell you what to buy/sell to line up with your target.
keywonc|9 years ago
Johnie|9 years ago
Companies evolve over time and grow in terms of scale. Take a look at Facebook and Google as an example.
geori|9 years ago
Clearly these are speculative bets on Wealthfront being as large as a mutual fund. The fact that the author doesn't see this means they're overvaluing a mutual fund manager and thinking that an algorithm can't come close to matching that performance. These startups have two major cost advantages over incumbents: 1) no researchers 2) no salespeople. They have higher profitability, so they'll be better equipped to spend on sales & marketing to achieve fast growth. This leads me to think that at least one of these companies is going to grow to the size of a large mutual fund and "WIN".
fullshark|9 years ago
frgtpsswrdlame|9 years ago
I work in HNW wealth management and I think that there needs to be better education on what for example a young person's IRA should look like. An ideal robo-advisor would make buy recommendations, ask you to never sell, and use education along the way to help prevent you from making the same mistakes most people fall trap to. I also think that if any of these companies have a desire to stay around for a while they need to be targetting the IRAs of young, high-income programmers. With a good fee and good education and assistance they can probably retain these customers, encourage them to max out contributions into their IRA (you should!!) and slowly build up a long tail of decent-sized accounts from people that may have only been interested from a tech perspective initially.
mattzito|9 years ago
If so, it would seem like an even better business would be getting into administering 401k plans cheaply with employers and then keeping people on the platform post-employment.
nateberkopec|9 years ago
lukejduncan|9 years ago
Wealthfront spells it out as: "In the unlikely event Wealthfront were to cease doing business, your account would be held by our brokerage partner until you transferred your account to a new broker or chose to liquidate your account to receive a check."
https://support.wealthfront.com/hc/en-us/articles/211004083-...
mabbo|9 years ago
harmegido|9 years ago
tehlike|9 years ago
scurvy|9 years ago
pscsbs|9 years ago
zazpowered|9 years ago
zazpowered|9 years ago
Analemma_|9 years ago
pscsbs|9 years ago
jjn2009|9 years ago
yalogin|9 years ago
Eventually I think these guys will and must come up with their own funds. Else it does not make sense for them.
cheriot|9 years ago
narrator|9 years ago
zazpowered|9 years ago
Veratyr|9 years ago
sulam|9 years ago
unknown|9 years ago
[deleted]
aphextron|9 years ago
sulam|9 years ago
twblalock|9 years ago