The Portfolio Management Revolution Technology Trending Paper Silicon Valley, CA Q4 2014

The Portfolio Management Revolution Over the past few years, a new crop of online wealth man- agement startups has come on the scene, threatening to disrupt a profitable business line once the sole province of banks and private advisors.

Betterment, for example, in four years has On the back end, technology startups such grown to over 50,000 customers and man- as Addepar, MyVest, and Kensho are serving ages more than $1B in assets. Such consum- wealth managers and private bankers by pro- er-facing services, known as robo-advisors, viding platforms that increase efficiency, feed also include Wealthfront, SigFig, Personal intelligence on market moving global trends, Capital, FutureAdvisor, and several others. and otherwise bring portfolio management into the 21st century. The emerging class of portfolio analytics Venture capital (VC) has pumped $800M into startups represent the new face of wealth man- the space over the last two years, recognizing agement, and their popularity attests to this. the runaway popularity of the new services and Many of the consumer-facing startups are aimed the vast potential for profitability. Investment is at the younger picking up speed. In generations, which the second quarter have high expecta- As wealth is transferred of 2014 alone, tions and, in many from the boomer investment in per- cases, are ignored sonal finance ser- by traditional pri- generation to generations vices was $261M, vate wealth man- according to CB agers and banks X and Y, it will represent Insights. who doubt the a $41T opportunity. value of their At the same time, business. banks can benefit from the algorithm-based portfolio analytics Wealthfront estimates that Millennials in the these startups are developing, as well as U.S. control about $2T in liquid assets today, the innovative interfaces and approaches which is expected to balloon to $7T by the that appeal to today’s 24/7 mobile enabled, end of the decade. Other industry observers demanding, busy customers. Many of the new say that as the wealth is transferred from the companies are eager to work with banks to boomer generation to generations X and Y, it license or otherwise serve up their back end will represent a $41T opportunity. technology.

Why the mass affluent left their advisors

Didn’t trust my advisor any more, 27% felt they were putting their own interests ahead of mine

Felt doing it on my own would yield 23% better outcomes

Realized I enjoy managing invest- 20% ments on my own

The quality of advice received was 15% poor/below my expectations

My financial advisor did not offer me 10% the right investment options

I thought my financial advisor was 6% not as competentSource: Massolution/The Economist Source: Deloitte

Crowdfunding 2 REBALANCING ACT

Personal Capital, a Redwood City, CA-based “MyVest’s Strategic Portfolio System is an ideal financial management website that offers a solution for any firm which wants to trans- panoply of personal finance apps is used by form their technology and operational infra- over 600,000 users to budget and invest more structure to scale their mutual fund advisory, than $100B of their ETF advisory or uni- money. The website fied managed account presents the user with MyVest performs programs,” said John an elegantly organ- Fennelly, managing ized, clearly graphed automated ongoing director, Wealth Man- and instantly updat- agement at Thomson able picture of his or rebalancing/portfolio Reuters in a recent her financial life. optimization on all of news release. “With MyVest, they also offer It’s the underlying a client’s accounts. the previously unat- technology, supplied tainable unified man- by another of Harris’s aged household pro- ventures, San Francisco, CA-based MyVest, gram. We evaluated the firms in the market- that differentiates Personal Capital from a host place and chose MyVest because they success- of other online financial managers. MyVest fully combine managed accounts expertise, Sil- performs automated ongoing rebalancing/ icon Valley innovation and an impressive man- portfolio optimiza- agement pedigree tion on all of a cli- to deliver a leading ent’s accounts. The “MyVest successfully product.” holistic software engine, known as combines managed In contrast to the the Strategic Port- accounts expertise, typical Silicon Valley folio System (SPS), startup, MyVest’s is available to port- Silicon Valley innovation management team folio managers in and an impressive is made up of finan- banks and other cial and tech industry financial institutions management pedigree to veterans. Their dec- as a powerful back ades of exposure to end that readily deliver a leading product.” how wealth manage- integrates with a ment is practiced and John Fennelly, Managing Director wealth management Wealth Management, Thomson Reuters their awareness of platform/system/ the painfully slow workflow. MyVest growth of technology recently concluded a deal with Thomson in this area pointed up the need for a new Reuters, the world’s leading source of intelli- type of advanced management software. gent information for financial, legal, and other markets.

Crowdfunding 3 VISUALIZE THIS

Data visualization is the underpinning for Moun- tain View, CA-based Addepar. The startup was founded to address the complexity of managing the wealth of venture funds, tech billionaires and other high net worth individ- uals. Founded by Joe Lonsdale, Co-founder of Palantir, the company has raised a signifi- cant sum, $65.8M, since its founding in 2009. Unlike an Excel spreadsheet, the Addepar dashboard gives the wealth manager the power to visualize Unlike the two-dimensional approach of an potential scenarios with a click of a mouse Excel spreadsheet, the Addepar dashboard gives the wealth manager the power to visu- alize any number of potential scenarios with a PDFs to Excel spreadsheets, and aggregate click of a mouse. For example, it can track the them directly from custodians and adminis- rate of return meas- trators. When there ured against the US are changes due to dollar, gold, or other Addepar clients include transactions the infor- asset class. Iconiq Capital, which mation is automati- cally updated within “Addepar is really a reportedly manages minutes. ground-up new plat- assets for former Zynga form for advisors,” Addepar counts says James Carney, CEO Mark Pincus, among its clients President and CEO Iconiq Capital, which of ByAllAccounts, of Facebook CEO Mark reportedly manages which Addepar is a Zuckerberg and COO assets for former client. “It’s a spread- Zynga CEO Mark sheet on steroids,” Sheryl Sandberg. Pincus, as well as he says. Facebook CEO Mark Zuckerberg and COO The platform can Sheryl Sandberg. import almost any type of document, from

ECONOMIC TREND DATA DEMOCRATIZED

Big Data analytics give financial institutions an Kensho has an intelligent engine it calls “Warren” edge when combined with global economic which answers questions posed in plain Eng- trends. Cambridge, MA-based Kensho is backed lish, in a structured format such as, “Which by Google Ventures, Goldman Sachs—which defense stock will ascend when Korea tests recently led a $15M funding round—and top a missile? Who benefits when a Category tier venture firms. It has the tagline “empow- 3 hurricane hits Florida? Which Apple sup- ering the largest financial institutions in the plier cheers the loudest when a new iPad is world with technology that brings transpar- released?” ency to markets.”

Crowdfunding 4 While squadrons of analysts can spend days on Warren is built on the secure NASDAQ cloud research, Warren has the answers instantly to platform, FinQloud, powered by Amazon these and more than Web Services (AWS). 65 million question It puts the power of combinations. Scan- Kensho scans world data disposition pre- ning through more viously unavailable than 90,000 specific events and can assess to all but the most events such as drug powerful Wall Street approvals, economic their impact on nearly banks and hedge reports, monetary every financial asset funds into the hands policy changes, and of RIAs and other political happenings, on the planet. financial managers. Warren can assess It could disrupt the their impact on nearly investing ecosystem every financial asset on the planet, as it con- as it now stands because this type of intelli- tinues to ingest and organize endless infor- gence can provide a real edge for investors. mation and add to its knowledge base.

LOW FEES, HIGH TRANSPARENCY

Existing wealth management services have avoid excessive headcount and they are not evolved more slowly and are often tied to legacy burdened with the overhead of brick and systems, whereas the new startups are cre- mortar locations. ating consumer products that are turning out to fill a large gap. Only 36% of wealth manage- For example, SigFig charges a flat fee of ment and financial advisory firms are offering $10 a month and trades are free if the user any type of account aggregation capability on keeps their money at Fidelity, Schwab or TD their site or portal, Ameritrade. Better- and fewer than ment charges 0.15- 20% give clients These startups promise 0.35% of assets, the ability to build transparency in how and Wealthfront or modify their per- is free for the first sonalized financial investments are managed $10,000 and 0.25% plan, according to and rebalanced. after that.Covestor , Aité Group research. a service that gives customers a chance Meanwhile, consumers are also waking up to to follow portfolio managers and invest exactly the fact that there are numerous fees blended as they do, offers some transactions at no into investments. The consumer-facing wealth cost and others for low flat fees. management startups are throwing open the curtain and promising transparency in how San Francisco, CA-based SigFig openly states investments are managed and rebalanced. that it is rooting out hidden fees for customers, Most are able to offer lower cost transac- rebalancing their portfolios based on its algo- tions because advanced analytics help to rithms. CEO Mike Sha has garnered attention

Crowdfunding 5 for his unvarnished criticism of such fees found in many index funds and other investments SigFig openly states the middle class use to save for retirement. that it is rooting out hidden fees. CONCLUSION

In the increasingly crowded space of portfolio management and analytics, new firms have hit on combinations that are showing a sur- prising appeal to a wide swath of the popu- trend, with its new Personal Advisor Services, lation, both middle class and high net worth. which uses algorithms to construct portfolios and initial plans.

Banks have an There are numerous ways that banks can make opportunity to stay use of the technology that is being developed. For example, eToro, a popular international ahead of the curve social trading and investment marketplace allowing users to trade currencies, commod- as the revolution in ities, indices and stocks, has spoken to banks portfolio management and other financial institutions about offering a white label version of their service. Ser- picks up speed. vices such as MyVest, Addepar, and Kensho could provide the kind of back end support that most banks currently lack. Banks have Meanwhile, banks and wealth management an opportunity to stay ahead of the curve companies are working to keep up. The Van- as the revolution in portfolio management guard Group is trying to get in front of this picks up speed. eToro, the World’s Largest Social Investment Network

Yoni Assia, CEO & founder at eToro, talks with Elliott Gotkine and explains how the social investment net- work keeps investors up to date with the latest moves by other traders. He speaks on Bloomberg Television’s “The Pulse.”

WATCH

SC Studios, Standard Chartered Bank Please read the terms and conditions San Francisco, CA and our data protection and privacy policy on Todd Schofield, MD SC Studios. Standard Chartered’s website. 6