How To Make A Small Fortune

Before we had kids, we travelled a lot. Once to Bonaire. And, it was/is simply beautiful.

You drive a Suzuki Samuri all over this little 5 mile wide island. Filled with sandy beaches and beautiful vistas. You back up the jeep to the water, strap on your scuba gear, and maybe 10 yards into the water is some of the most amazing scuba diving in the world.

I probably shouldn’t even be telling you this, because it’s that awesome.

My wife & I immediately decided, if we ever needed to move somewhere as part of our plan B. This would be our haven. We did the whole story line, complete with owning a bed & breakfast. We’d buy a small business too. Scuba dive daily. Eat lots of seafood. The kids (we didn’t have yet) would meet people from all over the world. We’d probably even make enough money to sock away for the rarely rainy days we’d experience living there. It was a fantastic dream. Magical. And then we talked to the locals. They all laughed. We hadn’t heard the joke.

“How you make a small fortune in Bonaire?” …You start with a large fortune.

And everyone in the financial world is staring at another magical coastline, with a $10 TRILLION dollar view. Which, I’d say is a rather large fortune.

The math basically breaks down like this: $2 trillion is buried in independents, $5 trillion is sloshing around the wirehouses, and another $3 trillion is in the DIY market. The math actually sounds a little fuzzy to me, but that’s generally the number I hear thrown around that seems to whet the appetite of investors in the new Online Financial Advisor space these days.

The reality is banks are, at some point, going to be a huge distressed real estate play themselves. The number of bank branches has expanded from something like 21,000 branches in the 1970s to over 80,000 in 2010. They’ve quadrupled their physical presence in an era when most people are doing more & more online. I see it first hand. Schwab and TD Ameritrade have online services I only dreamed existed just 4 years ago in my wirehouse days.

And just 12 years ago, I often met clients in-person for any number of things: forms being signed, review meetings, to talk about the markets — often with a stack of papers in tow. And these days, I can do most of it from my iPad — including having a video chat. That shift has yet to be fully realized. And the chart you’re seeing to the right is the data to back it up. (ht: @brettking)

So, online is not a replacement by any means, it’s more of an enhancement. Today clients like being able to see where their account is daily, weekly, monthly, and see transactions & fees quickly & clearly. They like seeing their money online now. Five years ago most of them couldn’t have cared less, “I’ll just look at the monthly statements, don’t sign me up for the website.”

This trend isn’t some anomaly. These aren’t even first movers we’re talking about. This has been a slow rolling reality for the last 5 years with services like Skype and Dropbox. The video camera on iPhones and iPads has started to accelerate it, of course — but the foundation for virtual is pretty well established.

Now, unlike the pretty picture above, I’m keeping this next one plain vanilla, trying to be as fair as possible. If someone wants to comment or fix any errors I’m happy to listen. I’m also not going to make any snarky comments about what you are about to see. But I will say this: a small fortune has been raised thus far, $80 million dollars by the eight firms you’re seeing here, to tackle the realities facing the large fortune sitting inside of the incumbent Wall Street firms.

I guess we’ll see if it all turns out to be a bad joke or not.

Click pic to grow.


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  • http://twitter.com/BillWinterberg Bill Winterberg CFP®

    I think Wealthfront raised about $20+ million.

    It’s somewhere in the “Robo Advisor” video I shot in February. John Prendergast talks about it.

  • iheartWallSt

    I think you’re right, but I didn’t want to stray from Crunchbase’s numbers.

    BTW — Great interview Bill. John & Alex are working on some really great ideas, and I have a great deal of respect for both of them. Thanks for sharing.

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  • http://profiles.google.com/jmitchell.rhc Jeremy Mitchell

    I perceive that money is the most personal thing to people besides their marriage.  People want a relationship with a trusted advisor.  The only reason anyone does online investing is because they want to do it themselves.  The moment they hire someone to do it for them, trust becomes the primary issue.  Giving someone else the financial results of your life’s work involves such a high level of trust, that it simply cannot be developed by an ethereal online firm.  The numbers on the chart bare this out…only two firms have average account sizes larger than 200k, and I expect that the only reason myGDP is doing well is because of their posted “backtested”, “trend following” results.

  • iheartWallSt

    It’s money, family, health. I do think online as an enhancement will be a feature that works, but like I said, I guess we’ll see. Trust is always in exercise in faith at first, reinforced by action. The key is to facilitate that evolution over time & I think it is possible to create this environment online. Thanks for commenting.

  • inthewoods

    Obviously these guys are going to have to get big in order to make any real money.  By that, I mean something like $500m to $1b to match VC expectations.

    I’ve taken a close look at FutureAdvisor, Personal Capital, Coinvestor and Wealthfront.

    Wealthfront is interesting because they recently pivoted to a model of providing a single proprietary investment model and targeting tech employees.  In my review of their model, however, there’s nothing very exciting behind it – it will appeal to someone that knows little about investing by throwing around “Modern Portfolio Theory” (and they fail to mention what that would have done to your portfolio in 2007-2008 but whatever).Of the list you have, the one most likely to succeed, in my opinion, is Personal Capital – just based on the people/capital involved.  My guess is that they try and get decent sized and then go and try to acquire other RIAs if they don’t grow fast enough.

    The other guys really have very little of value – so they might be acquired for the assets under management but that’s not going to be for much.

    Great post – I’ve been thinking along the same lines as you….

  • iheartWallSt

    Nice to hear your thoughts. Thanks!

  • Smeyeratbills

    Hi, 

    Great site! I’m trying to find an email address to contact you on to ask if you would please consider adding a link to my website. I’d really appreciate if you could email me back.

    Thanks and have a great day!

  • http://twitter.com/jonstein Jonathan Stein

    Jon Stein, Founder and CEO of Betterment here. You ought to check out Betterment! I am biased, of course, but it’s the best of the online asset management services – and I’m comparing us not to this crew of challengers but to the Vanguards and E*Trades of the world. Betterment has the most seamless execution, best investment mix, most helpful automation, etc. You have to try it out for yourself to understand how great it is. So try it! There’s no minimum, and it’s better than anything else you can do with your money.

  • iheartWallSt

    Jon, thanks for commenting although I’d be interested to hear your take on a few things. 

    1) Your average account balance is $3400, if that account doesn’t deposit at least $100 a month, they are subject to a $3 a month fee. That fee on that balance of account amounts to a little more than 1% a year, plus the fees for the ETFs involved. Am I missing something?
    2) I see you fixed the typo on your site, but no one every addressed anything else I happened to mention in this post. http://iheartwallstreet.com/2012/04/17/et-tu-betterment/

    3) Do you really believe you’re better than “anything else” I can do with my money? That’s like your sales-y CEO schtick, right? Like if I had a million dollars, giving it to you would be better than ANYTHING I can do. Isn’t that a bit presumptuous?

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  • http://twitter.com/jonstein Jonathan Stein

    Hi Scott,

    Jon Stein here.

    1. We designed our pricing structure to give customers value at every balance point, but as with the rest of the product, we try to encourage good behavior wherever appropriate. The pricing for accounts below $10,000 encourages a $100/month deposit to take advantage of the .35% fee, which is a very modest monthly amount. We’ve actually found that a large majority of such users have opted for the monthly deposit option, which is good for us, and also good for them. Generally, we are seeing that when we incentivize good choices, everyone wins – that’s a great feeling.

    2. I’ve now responded to that post directly. I always welcome open discussion of these issues – customers will ultimately benefit. If you’d like to continue the discussion, please email me at jon at betterment.com. I might not otherwise see your responses.

    3. I can say with no reservations that I do believe that Betterment is the best option for virtually all investors, whether you have $10,000 to invest, or $1,000,000. How could we do what we do every day, if we didn’t believe that? I founded Betterment because I came to the conclusion that the the basic principle of what people should do with their money is actually quite simple, and a large part of the investment industry has evolved to obscure that simplicity for its own benefit. Modern portfolio theory isn’t exactly right all the time, but it is mostly right most of the time, and what’s right about it doesn’t cease to apply to a seven or ten figure sum. Human behavioral biases don’t evaporate when a human reaches a million in assets. The principles behind Betterment – to encourage people to make the right choices and stick with them – apply at every level, so it’s not surprising that this simplicity is viewed as radical and threatening by some incumbents. Of course, I’m biased, but this is not a sales schitck – it’s the reason I go to work every morning.