SigFig takes on investment fees with automated portfolio management, just $10 per month

By Michael Carney , written on December 10, 2013

From The News Desk

Since launching in 2011, SigFig has aimed to make it simpler and more efficient for everyday investors to manage their portfolios. Initially the company built an investment Wiki, then it evolved to offer data-driven investment advice centered around minimizing fees, management expenses, and risk adjusted returns. Today, the company is taking a cue from its clients and automating the portfolio management process.

SigFig’s new service enables consumers to identify their personal risk tolerance and then develop a balanced portfolio based on these needs. The company then programmatically rebalances the portfolio on an as-needed basis going forward to adjust for changing market conditions. SigFig invests primarily in low-cost ETFs (exchange traded funds), which allows the company to minimize trading commissions and keep the monthly fee remarkably low.

How low? Ten dollars per month, or the price of about two gourmet lattes.

SigFig doesn’t require its users to transfer assets from their current brokerage accounts into its custodianship. Rather, the company has formed partnerships with several of the largest brokerage firms, including TD Ameritrade, Fidelity, and Schwab, and invites its clients to connect their existing accounts to SigFig for remote management. The setup process is fully electronic – a rarity in this maddeningly fax-driven industry – and takes less than one minute, founder and CEO Mike Sha promises.

Currently, the majority of SigFig user portfolios are mis-managed, according to Sha. One in eight users hold more than $10,000 in cash in their portfolios, he notes. Half of all users hold six or fewer stocks, meaning they’re poorly diversified, and the same number hold no bonds, making them overly exposed to risk. Worst of all, one in five investors have not touched their portfolios in over a year, meaning that, even if they were balanced at the start, they are likely anything but today.

“What people buy and what’s good for them is rarely the same thing,” Sha says. “Fees and returns are inversely correlated. Fees are the long term bad egg in every portfolio.”

Prudent investment advice and ongoing service is something that has been available only to the wealthiest investors previously, those who could attract private wealth managers. SigFig estimates that the average asset management customer is paying $7,300 per year in total fees for this service, more than 80 percent of which it believes it can eliminate.

The company is making its automated portfolio management service available to any user, regardless of the value of their investment assets. Users holding under $10,000 get access to the platform for free, the rest pay the flat $10 per month whether they have $11,000 or $11 million under management.

This is an entirely new asset management model, both in terms of its functionality and its cost structure. Because it’s so new, there are a number of unanswered questions. First, it is unknown how the average individual investor will feel about relying on computer algorithms to manage their money. It requires a real leap of faith. Given this, it’s unclear how many paying users the company can attract. And because the company charges per user, and not per dollar under management, it’s this total paid user figure that will determine its success or failure.

SigFig needs 83,334 users to generate $10 million in fee-based revenue. Move the decimal point in either direction to arrive at your projection of choice. Sha believes that this model has the potential to serve millions of paying customers. For every million paying customers, SigFig will generate $120 million in revenue, under the current model.

The company has raised a total of $17.5 million across two rounds of funding – the former under its prior name, Wikinvest – from backers including Union Square Ventures, Bain Capital Ventures, and DCM. This will mark its first significant monetization effort, with earlier revenue coming through referral fees when a client switched to a new brokerage firm recommended by SigFig and through advertising revenue shares with its publisher partners.

SigFig’s current investment tools, which it licenses to publisher partners like CNN, USA Today, and Yahoo Finance, have attracted more than $100 billion in assets being tracked on the platform. The company doesn’t disclose the number of individual users making up this total, but if the average assets under management were $100,000, then the company would have 1 million users. Estimate accordingly. If the company could convert 10 percent of these hypothetical users accounts into paying users – an above average conversion rate for freemium services – it would have its $10 million in annual revenue.

SigFig will be competing against the giants of the Wall Street and Main Street asset management universe. But more importantly, it will be competing against the inertia of the do-nothing status quo. The reality is that SigFig appears to have created a solution that is both simple and low cost enough that it is likely investors will keep their accounts on auto-renew alongside their magazine subscriptions and wine of the month club – that is assuming it delivers a reasonable level of return on investment (ROI) relative to market averages. The big challenge will be getting them over the initial trust-based hurdle to try the platform out in the first place.

SigFig Chief Investment Officer, Terry Banet has 25 years of experience in the traditional asset management world, including as the CIO for the Fiduciary Asset Management business at JP Morgan. According to Banet, both clients and asset managers are growing weary with the status quo, which largely revolves around fee chasing.

“Personally, I had had enough and wanted to find an asset management model with simplicity and less complexity,” Banet says. “Ask anyone on Wall St. and they’ll likely tell you, ‘It’s not like what it used to be.’”

Banet is as confident as anyone that SigFig can build a massive business by offering set-it-and-forget-it portfolio management. “The market is big enough for both the ‘personal touch’ and ‘automated, self-directed’ asset management models, but the market is trending toward the latter,” she says.

If Banet and Sha have read the signs correctly, SigFig has skated to where the proverbial puck will be in the near future. The pair are now poised to take their best shot on goal.