Automated Wealth Management & A Gateway Drug

There has been a lot of funding to and so-called ‘innovation’ within the tech-driven wealth management space lately. Most notably, Wealthfront and Betterment are competing to effectively manage people’s money through relatively standard practices that have existed for years (basic asset allocation via ETFs, indexes, etc.).

As this wealth management tech space moves forward, I believe the focus should be on educating users to a minimal point. While some may say they do not wish to spend any time to learn anything about investing, I believe that understanding something that affects your future livelihood in such a profound way deserves some attention.

The people who use these “automated wealth management” (AWM) services are often those who know they should invest, but don’t know how. These companies have a place and provide value to a large group of people that otherwise would not invest their money in public markets. With that said, I don’t think it’s the most important part of the wealth management ‘tech stack’. And to throw some data behind this, both Wealthfront and Betterment underperformed all major US indexes in 2014, as well as the most common passive indexing strategy (60% stocks/40% bonds) on both a total return and Sharpe ratio basis.

Where I believe real innovation has taken place is in connecting layman thought processes of business models and trends to public market investing. Think companies like Motif Investing or Kapitall. These companies aim to lower the barrier of investing by allowing the user to pick themes in which to invest in. Believe that 3D printing is going to be huge? Motif does the work for you and tells you that companies x, y, and z will benefit from mass adoption of 3D printing tech.

Many will argue that the oversimplification of qualitative ideas often does not translate well to public markets due to external, macroeconomic factors affecting broad markets, which uneducated investors are unaware of. That may be true, but these services have the potential to be gateway drugs to a broader education in market behavior and investing.

Instead of holding an ETF that’s composition lacks any discernible tangible assets to the layman, users can understand the market dynamics that affect each individual stock in their Motif, as well as its performance. Ideally this curiosity will lead them to understand the various factors that contribute to a stock’s price, as well as the overall markets. This in turn could even lead them to purchasing the same ETFs as Wealthfront or Betterment, without having to pay an additional .35% to have it “managed” for them.

None of this is to say that these AWM companies are bad. They have great business models effectively built around AUM instead of the less-scalable DARTs, which companies like Motif and Kapitall survive on. But, taking off my investor hat, when we think about the future of AWM, there are bigger opportunities at play than “innovating” what personal wealth managers have been doing for years, and lowering the barrier to understanding public markets and investing is at the top of that list.

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