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New models of online investment advice and services- part 2 Print
index.jpgNew models of online investment advice and services- part 2

New investing offerings aimed at the mass retail investor market are gradually appearing that are based on online advice. They use online questionnaires and other technology to minimize labor costs and provide cookie-cutter advice using model portfolios, with some customization to take into account some personal circumstances. In part 1 of this 3-part series we looked at the forces behind these new product offerings. In this part 2 we look at the range of new entrants in the USA. The US market is blessed with a wide variety of new entrants, as well as a number of traditional financial groups who have supplemented their basic businesses to offer similar competing services. (NB- photo is of US economist and indexing guru Burton Malkiel, currently asssociated with new entrant WealthFront). A DIY investor will find entrants who can help them obtain low cost, independent one-off advice and low-cost index based investment products. But the business models of other entrants are less investor-friendly, so buyer beware is certainly the operative phrase here. In the final part of this 3-part series we will look at developments in Canada. 


Are online investment models right for you? Not necessarily. Our own position is that every individual investor should pick the investment method that best helps him or her to invest on a cost and tax effective manner in a diversified portfolio of investments with an Asset Allocation appropriate to their personal circumstances. In particular our recommended approach is to

  • ·most importantly, determine the asset allocation that is right for you; if you need help in this regard, seek one-time, cost-effective independent  financial advice paid in an easy to understand, transparent fashion (such as on an  hourly basis)  ; and
  • select low cost index ETF’s that correspond to each asset category;

There is a wide range of internet-based new entrants, and they vary enormously in approach. Some offer services that are closely aligned with our philosophy, many do not.

In this commentary we will introduce you to a variety of new entrants in the US market.

Range on new entrants- an overview

 One of the best sources describing these new entrants in the US is Corporate Insight . Here is a summary by Grant Easterbrook of Corporate Insight from their site:

Whether or not individual brokerage firms embrace some combination of these online alternative models, the broader retail investment industry will likely feel their collective impact. Each new competitor struggles with raising awareness and achieving scale,but as a whole, they exert pressure on  existing  investment industry players to offer greater transparency, lower costs, and more modern and  usable online  platforms. In the long term, consumer demand for cheaper and more transparent financial solutions shows no sign of abating. As a result, we expect the number of these investing and advice start-ups–and their unique business models – to continue to grow. ....While entrepreneurs agree on the forces that are spurring innovation, they have brought a broad variety of products and services to market in response. Many do follow similar themes, though; we have classified these 37 firms into eight main product types:

· Algorithm-based investment advice

· Packaged portfolios

· Financial advisors and financial planning

· Online financial advisor search

· Trade- mimicking platforms

· ETF/mutual fund alternatives

· 401(k) guidance

· Other

........ Easterbrook Corporate Insight  or as a PDF doc.22xx- Easterbrook Corporate Insight Jan 2012 Guide to Online Investment Alternatives.pdf.


Easterbrook assesses the current state of these new entrants as follows. They offer low costs, fee-transparency and online-savvy platforms, but are plagued by an investment expertise credibility gap that needs to be corrected.

If there’s one key takeaway across all product types, it’s this: emerging firms offer lower costs, more transparency on fees and performance, and more modern and usable online platforms

than most established investment firms. These start-ups are not without significant weaknesses, though. Highest among those is a credibility gap. Many firms do little to prove their investment expertise and trustworthiness. They devote insufficient website real estate to establishing the credentials of the people behind their products. So long as prospects are not presented with a compelling case for the firm’s trustworthiness, it will be hard for these start-ups to win significant investable assets in today’s turbulent markets. Other recurring weaknesses include superficial investor questionnaires and the absence of robust mobile platforms.

Last Updated ( Saturday, 02 November 2013 )
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