When discount online trading firms like Ameritrade and eTrade came onto the scene in the 1990s, millions of Generation X "kids" like me made the jump from full-service brokers (where individual stock trades could cost $80 to $100 or more) to the online action (about $8 to $15 per trade at the time). Instead of paying lots of transaction fees, we kept more of our money working for us -- compounding year after year.
Now, fast forward to the present. Poke around Silicon Valley. Ask the Millennial Workforce where they invest their money. Be sure to ping I.T. entrepreneurs and employees who have built and sold companies, and have large sums of money they want to both protect and invest.
Sure, the big Wall Street brokerages dial those high net worth folks, striving to manage their windfalls for an annual fee (typically about 1 percent or so). But then lump in trading fees plus Mutual fund management fees, and suddenly your "big" annual returns are a little smaller. In fact, they are.
Another Market Shift
So what are I.T. entrepreneurs doing to manage their money? When they're not plowing cash into business, a growing number of folks are using newer, even lower cost automated trading and "wealth management" platforms like Wealthfront, Betterment and Personal Capital.
While I'm not endorsing any particular wealth management platform, I am intrigued by the automated, low-cost approaches that those companies promote. And in this particular case, I'm pretty familiar with Wealth Front.
Launched in 2011, Wealthfront already manages more than $1 billion in assets (perhaps as much as $2.5 billion), and the company recently raised another $64 million to drive the business forward. Plus, Wealthfront is testing a new service -- called Wealthfront for the Workplace -- with such employers as Google, Palantir and the San Francisco 49ers.
While professional money managers typically charge that 1 percent annual management fee, Wealthfront manages your first $10,000 for free and charges 0.25 percent for dollar amounts above that.
What do you get for that free or 0.25 percent fee? The answer involves an automate system that measures your risk tolerance. From there, the system purchases low-cost Exchange Traded Funds (ETFs) -- basically diversifying your money across U.S. and foreign stocks, municipal bond funds and more. Invest $100,000 or more with Wealthfront, and you'll benefit from so-called tax harvesting during market corrections. Tax harvesting isn't new. But Wealthfront is taking it mainstream in a far more automated way.
Call Me Skeptical (At First)
When I first heard about the Wealthfront model, I thought it was far too good to be true. But then I started poking around. In conversations with five different I.T. entrepreneurs this past week, all of them confirmed to me that they have money on the system.
Plenty of investors are jumping in -- which has entrenched rivals and old guard investment firms worried. A prime example: Earlier this week, Charles Schwab Corp. confirmed plans to offer a "robo-account" service starting in 2015. It's a direct response to Wealthfront.
What If the Platform Dies?
Admittedly, I'm still a little wary of Wealthfront, Personal Capital and other wealth management startups. We all know plenty of venture-backed companies that failed. And if these wealth management platforms go dark, will customers be able to get their money out of their systems?
Of course, Wealthfront and its rivals have a prepared answer to that frequently asked question. In Wealthfront's case, the company claims:
"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. During this period your account would not be managed by our brokerage partner."
That certainly sounds safe. And I'm sure the SEC is keeping close tabs on startups like Wealthfront and Personal Capital (right?).
Diversity Still Rules
In my case, I'm hedging my bets. I certainly like the concept of low-cost wealth management platforms and exchange traded funds. But I also highly value the personal advice that full-service financial planners offer. So I'll likely stick with multiple systems as I try to build a nest egg.
But this isn't about me. It's about a big market inflection. And it goes like this: In the 1990s, discount online trading systems like Ameritrade and eTrade disrupted Wall Street's high fees and phone-centric ordering systems. Now, automated wealth management systems like Wealthfront and Personal Capital are disrupting the system again.
Thousands of millennials -- many of them being I.T. entrepreneurs -- have already signed on. I wonder how many of my GenX friends will follow the millennials' lead.
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