How Will Online Investment Alternatives Impact Financial Institutions?

by on Oct 08, 2012

online_investment_alt_imageGrant Easterbrook is a Research Associate on CI’s Consulting Services team and the author of Advancing Financial Advice: Complete Guide to Online Investment Alternatives. He can be reached at 212-832-2002 x-131 orgeasterbrook@corporateinsight.com.

Over the years we’ve seen the occasional online startup try to disrupt the investment industry in one way or another. But what was once a trickle has turned into a flood in the aftermath of the financial crisis, to the point where today Corporate Insight tracks over 30 emerging online investment alternatives including:

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This proliferation of firms raises many different questions and concerns for the established industry. The following are three takeaways apiece from the perspective of self-directed investors and do-it-for-me investors, those who prefer a level of professional support and guidance.

Self-Directed Investors

1. Among the industry incumbents you can find online planning tools, investor communities and financial dashboards that aggregate outside account information. By comparison, however, the capabilities of some of these newcomers are much more advanced and demonstrate the potential of these three concepts that the industry has yet to realize.

2. Several startups offer algorithm-based recommendations for either creating/improving an investment portfolio or for recommending the optimal mix of a 401(k). The capabilities of such tools are growing increasingly sophisticated, though we think the best available automated investment advice platform is essentially an advanced fund screener.

3. Two firms, Folio Investing and Motif Investing, offer an enticing alternative to mutual funds/ETFs where investors actually own all of the underlying securities. For example, once a client has purchased a Large-Cap Blend Folio or an International Bonds Motif, they can buy or sell either shares of that particular Folio or Motif or the individual stocks in that basket.
Do-It-For-Me Investors

1. Conventional wisdom says that financial advisor relationships begin through referrals or an in-person meeting. Some startups are challenging the notion by offering tools to let you search for an advisor based on different criteria. This idea is still in its infancy, but given how much consumers already rely on online search, “shopping” for an advisor is an interesting possibility.

2. Many of these startups offer some form of interaction with an advisor through the online channel. In most cases, that relationship boils down to speaking with an advisor over the phone to determine the selection and timing of the core product. Only three firms offer more advanced services, and we don’t yet see an online version of the traditional full-service advisor. That said, if these online relationships prove viable it’s not hard to imagine that over time more comprehensive online advisory services would seem feasible.

3Trade-mimicking technology may make money managers more accessible to the average investor. Rather than directly investing assets with a money manager, a trade-mimicking platform is one that enables investors “follow” a given manager by mimicking that manager’s portfolio and each trade they make going forward. You won’t find John Paulson or David Einhorn on one of these platforms anytime soon, and some firms even let you mimic practically anyone on the network. But if this model proves viable it would revolutionize an investment type previously only available to a select few investors.

Closing Thoughts

There are a variety of products and managed solutions offered by these newcomers, and unfortunately we don’t have time to get into some of the other interesting developments. If there’s one thing to remember, it’s this: on average, these solutions are lower cost (sometimes even for a flat, rather than asset-based, fee), more transparent, and their websites look like something a consumer would expect to see in 2012.

Inevitably, individual startups will fail due to adverse markets, barriers to entry and their own inherent weaknesses. Collectively, however, they will only increase the pressure on the investment industry to lower their fees, to be more transparent and to offer more modern and useable online platforms.