Firms originating in Silicon Valley are bringing their technological expertise to bear on wealth management services in a bid to make these more widely available at lower cost: should the industry be wary or encouraged?

In this two-part series about new wealth management businesses aiming to create a “high-touch” service for the mass affluent, the effects on the ultra high net worth wealth management industry are considered of the launch-to-market of these largely tech-based offerings. The second part of this feature will be published tomorrow.

Silicon Valley is one of the most powerful engines of growth in the US and as such is attracting wealth management firms with a view to picking up new clients. Conversely though, firms originating in the Valley are bringing their technological expertise to bear on wealth management services in a bid to make these more widely available at lower cost: should the wealth industry be wary, or encouraged?

And while changes in the mass affluent sector may not seem relevant to the high-touch, exclusive service offered by high-end wealth managers, it could be argued that by redefining what high-end wealth management is not, the mass affluent offering forces the upper echelons of the wealth management industry to keep reevaluating what it is.

The technology industry certainly has a history of revolutionizing business practices. Who can imagine a working day now without a mobile phone, or the internet, or indeed a mobile phone that can access the internet?

Two firms pioneering a tech-based service for wealth management are FutureAdvisor and Personal Capital.

“We’ve been at this for a couple of years and we’re truly trying to build a financial services company in the right way,” says Kyle Ryan, executive vice president at Personal Capital. The firm’s CEO is Bill Harris, former CEO of PayPal, who, according to Ryan, views Personal Capital as “the culmination” of his career.

Ryan has a background in the traditional wealth management sector: he spent ten years at Fisher Investments and (in typical Silicon Valley style) was the youngest global vice president at the firm. Before joining start-up Personal Capital - which officially launched last year - he ran private banking and wealth management operations in Northern California for Merrill Lynch Wealth Management.

Bo Lu, on the other hand, co-founder and investment professional at FutureAdvisor, has a far from traditional wealth management background. He got into investing for himself at the age of 16, with money earned from a summer job, and went on to work for Microsoft.

FutureAdvisor was launched properly this March, having exited the Silicon Valley incubator program of which it was part in August 2010 and completed extensive beta testing of its software. It has a team of eight, split between engineers and finance professionals.

“FutureAdvisor was started on a very simple vision: high quality advice that family wealth offices offer should really be available to everyone,” says Lu.

This idea came from his personal experience of helping friends in the tech industry who “didn’t have the asset minimums” for high-end wealth management, but nevertheless were well remunerated.

When Lu looked at what they were doing with this surplus cash, he thought they “were paying too much for advice and weren’t well diversified”.

What are the offerings?

FutureAdvisor is a free app which clients can sign up to and, by providing their details including investment horizon and taking a risk tolerance questionnaire, receive a target asset allocation.

After this, the system connects to the client’s existing brokerage accounts, IRA, 401(k) plans – including old 401(k) plans – and uses the same technology as Mint to create a dashboard. This shows clients whether they are on track to their target allocation, whether they are diversified, tax efficient, and whether they’re paying more than necessary on fees.

The final step is to give actionable steps for the client, in terms of buying and selling, to get closer to his or her target asset allocation and tax efficiency at the lowest cost in terms of fees. It also uses the least number of trades to get there and takes into account nuances like limitations on 401(k) plan options. Clients can then upgrade to accounts which offer enhanced services such as rebalancing prompts, and scheduled calls with an investment advisor.

Personal Capital’s offering is a free dashboard that compiles all an investor’s accounts -  including bank, investment and credit accounts – as well as bills, to give a complete picture of his or her financial picture. On this platform, there are now “well over 10,000” clients, says Ryan, with balances ranging from a few hundred dollars to nine-figure balances.

The technology monitors all transactions passed through Personal Capital’s system and adds up total costs to the investor. The company is currently investing in its back-end system to be able to show advisory fees too.

This is the free part of the service, while Personal Capital’s business model is based around developing some of these relationships into advisory relationships, similar to a more traditional wealth management model - but with communication delivered purely though electronic means.

One of the challenges for both firms will be whether they can get enough clients to part with cash when they are already getting something for free - a challenge that many web-based businesses (including the music and film industry) grapple with.

So far, Personal Capital has developed around 100 advisory relationships since launch and has “a huge pipeline of folks,” according to Ryan. Its wealth advisory team has around ten members, and the firm says it has “really exciting plans and ambitions to continue this trajectory.”

Not all things to all people

Lu is not trying to claim a web app replaces a good financial advisor in all cases; he acknowledges it depends on the client type and what he or she is looking for.

“To be fair I think good financial advisors definitely advise you in a much broader way,” he says, citing emotional coaching on spending and budgeting, as well as a holistic approach to wealth management as examples.

In contrast, “FutureAdvisor tries to very sharply attack a single problem,” says Lu. “Financial advisors are able to do a broader swathe of problems for a few – we solve one for many.”

Ryan says The UHNW “have plenty of options already…The way the wealth management is geared at the moment, you have to have $50 million to get comprehensive wealth management, but we don’t think so.”

The “sweet spot”

If this opinion held true in the past though, it’s changing quickly. Hit with regulatory change affecting other areas of business, banks are realizing the importance of “preferred clients”. Merrill Lynch’s Merrill Edge offering and JP Morgan’s drive to ramp up its Chase Private Clients services are testimony to this.

A recent McKinsey report highlighted the profitability that can be gained in the $1 million - $10 million segment in particular, predicting this will account for over 80 per cent of wealth management revenue by 2015. The firm’s 2011 Global Private Banking survey says this segment is one of the largest and fastest-growing growth prospects of the next decade, and that these “core millionaires” will also emerge as the most profitable segment of the wealth market, according to the study.  

Different types of firms are taking different approaches to wooing this segment: in its latest investor day presentation JP Morgan highlighted the importance of the branch network for the busy clients of CPC; tech-based offerings, on the other hand, extol the benefits of low costs and digital communications. There is also, as Robert Ellis, principal of Fast Track Advisors, pointed out, the option of an “online brokerage combination of good tools and a strong social network to provide advice,” which he believes could be highly relevant in the HNW space.

Given the opportunities in the mass affluent/high net worth segments it is likely a number of competing business-models will create a lively landscape in the industry, which should, all things considered, hugely widen the choices for clients.