Good Lord, how the floodgates of startups looking to disrupt the financial industry have swung open.
A raft of innovation, glitzy UIs, and momentum are surging around three main areas. The first is disrupting payments and the wallet, where Square and Braintree are building financial forces to be reckoned with, even if they aren’t disrupting credit cards, and smaller fries are seeking to digitize other parts of the wallet here and there. The second category is leveraging big data to disrupt all types of categories of lending. Venture capitalist Jeremy Liew wrote about this trend in depth for PandoDaily. If you haven’t read it, go do it now.
If the first group is for everyone and the second is for the lower two-thirds of the 99%, the third group is for the upper reaches of the 99%. Is helping the pretty-well-off quite as good as changing the world? Maybe not. But that doesn’t mean it’s any less ripe of a market to be disrupted. And good God, if this Goldman Sachs tell-all goodbye doesn’t make you want to stick it to existing wealth managers and financial advisors, nothing will. (Need more evidence? That bizarre image was the number three result for “banker” on Shutterstock. That’s what we think when we think “banker!” A fat douchey guy smoking a cigar in a tux with bad sunglasses on!)
In addition to Wealthfront, which I’ve I’ve written a ton about, an interesting player in this market is Personal Capital, which launched last September. While Mint developed a modern way to budget your money, Personal Capital is focused on long-term wealth management. If you’re like me, that’s one of those things you know you should be on top of, but tends to take a back seat to the rigors of everyday life.
The company is launching a slick new iPad app today that does a lot of cool things. It allows you to see all of your assets and your cash flow, and drill down with one tap into individual transactions and individual holdings across mutual funds and various stock portfolios. The average users has 15 accounts and Personal Capital makes sense of them all as if they were one.
Even cooler, this new version tracks the value of employee stock options and allows you to play the sometimes masochistic “What If?” game, to see what your net worth would be if your company IPO’d at a certain price. Tailoring an app for the Web-savvy stock option holder eyeing a potential exit is a smart way to get users. There are thousands of about-to-be-minted millionaires inside Facebook alone and those are exactly the people who are more likely to want a technology solution to wealth management. It’s a game Wealthfront has played as well with its post-IPO stock sale simulator.
Personal Capital doesn’t believe that technology is all it takes to solve a problem, so it employs financial advisors who are nicely compensated but a lot cheaper for the company to employ, because they aren’t sitting in brick-and-mortar branches with high overhead. Using them will cost you 1% of assets under management, versus the industry rate of 1.5%-2%. And the iPad app allows you to FaceTime chat with them.
Personal Capital CEO Bill Harris is insistent that this software-human hybrid approach is key to really disrupting wealth management. The Valley loves software only, but fundamentally, people want someone to talk to when it comes to long-term financial planning, he argues. “The Valley treats this like a software problem, but financial services doesn’t work like that,” he says. “The more money you have the more you want a person to talk to.”
It’s a nice hybrid approach. I have a previous retirement account I rolled over from Fidelity, but it’s literally just been sitting in an account because I haven’t taken the time to figure out where to invest it or look at what my husband and my existing stock and bond exposure is. The idea of all of that in one easy to navigate app, and the ability to ask a component advisor where we should put that extra $40,000 at a reasonable price would be awesome.
The problem is the same problem I had with Mint. No matter how much I want to, I will not sit at a computer and enter all of my financial information. I’m a big believer that the Web has to be built for the way we are, not the way we wish we were. And unfortunately most of these financial apps fall squarely in the way-I-wish-I-was category.
Still, Mint succeeded with plenty of more organized consumers willing to enter loads of accounts for the value it provided, and I think Personal Capital provides at least that much value. Just six months in, the company has some interesting insights about users with $100,000 or more in investible assets.
For instance, average investors have money in about 15 mutual funds, spread across multiple accounts. Given that more than 60% of mutual funds underperform the market, such a broad spray-and-pray strategy makes it almost impossible to do well. Investors would be better off just putting all their money in an index fund, the company argues. (That’s another trend in this new wave of financial startups: Everyone is calling bullshit on the value add of the mutual fund industry. More of this, please.)
Personal Capital is not run by a bunch of idealistic 20-somethings trying to rip a hole in the finance world. Personal Capital has a dream team of digital financial experience behind it, starting with Harris, who was formerly CEO of PayPal and CEO of Intuit. I know what you are thinking: “Aren’t those the stodgy lame companies this newer generation is trying to disrupt?” At least Harris cops to that too saying his whole career of building financial software has only made the problem of data fragmentation across dozens of accounts worse. He calls Personal Capital the “culmination” of a twenty year career in the industry.
He compares finance to media in that these are the only two areas of the economy that can exist 100% digitally. Traditional media has been slaughtered and ripped in two by the Web. [Editor's Note: Hooray!] So why hasn’t finance? A big reason is the too-big-to-fail institutions are fighting it tooth and nail. Over the last twenty years as people have increasingly become more comfortable banking digitally, the number of brick-and-mortar branches have tripled.
Inside banks’ IT departments, it’s no better. The technology stacks old banks are using are old even for the enterprise software world — decades and decades old, Harris says. “No one even knows how to reverse assemble these systems,” he says. “Banks are paid to be conservative with your money but they should take risk on technology. The reverse of that has happened.”
Personal Capital has raised $27 million in funding from IVP and Venrock. Some screen shots of the app are below.
(Amazing image of a “banker” courtesy of Shutterstock. I love Shutterstock.)