Why Silicon Valley Is Eating Wall Street's Lunch

By: Craig Birk, CFP

JPM Morgan CEO Jamie Dimon said earlier this year: “When I go to Silicon Valley…they all want to eat our lunch. Every single one of them is going to try.”

New technology-driven investment management services have collectively attracted over a billion dollars in managed assets in the last year. This is a drop in the bucket for the industry as a whole, but growth is accelerating rapidly. And Wall Street has taken notice.

A huge business opportunity exists simply because most Americans are not investing as well as they should be. Traditional product-based approaches generate billions in profits for big financial institutions -- but fail to deliver for clients. The large banks and investment firms are looked at with wary eyes and are slow to offer better solutions. It is no surprise Silicon Valley attacked the problem.

$13 trillion of assets are currently unadvised. This is a huge slice of the pie for new entrants to go after. But what is the West Coast bringing to the table? Let’s first look at the Wall Street model to see what’s different.

Wall Street wealth management:

Model #1: Brokers. Brokers can make money by earning commissions on products their clients buy. A broker is technically more of a sales person even though he or she often uses the term “advisor.” Brokers are often heavily incentivized to recommend investments that earn them more money. Legally, they have to meet a bar of “suitability” to justify pushing a product. If they earn a commission at the sale, their profits are not tied to whether your portfolio loses or gains value over time.

Model #2: Registered Investment Advisors (RIA). RIAs make money by charging a portion of their clients’ assets annually or a fee for services. Legally, RIAs have to meet a higher “fiduciary” standard, which means they are obligated to act in their client’s best interest. Since RIAs charge fees based on a percentage of assets, they earn more when your assets grow – unlike brokers who get their fee regardless of whether you lose money later.

Silicon Valley wealth management:

Model #1: Software-only. So-called “robo-advisors” usually make money from automated ETF wraps. They are often referred to as robo-advisors or algo-advisors due to a lack of a human interaction - their websites ask visitors a series of questions, and based on the responses, an algorithm suggests an asset allocation. The model portfolio is usually a basket of ETFs or mutual funds, which are rebalanced periodically. They are usually RIAs and charge a percentage of assets.

Benefits: Easy access to asset allocation and relatively low cost

Drawbacks: Potential over-simplicity and lack of customization

Model #2: Digital wealth managers. As a digital wealth manager, Personal Capital combines human RIAs with high-performance technology. Teams of Registered Investment Advisors (RIAs) in San Francisco and Denver create personalized strategies, leveraging military-grade security, state-of-the-art software, low trading costs, and Smart Indexing strategies. Personal Capital does not use the broker model and its advice is therefore conflict-free, unlike advice from some Mutual Fund companies or Banks who also offer advisors.

Benefits: RIAs are on-call when there is a market downturn, when you need to roll over a 401(k), or when you need advice on life events like marriage, college, and other common changes to your financial plan.
Drawbacks: Full-service comes with fees higher than the average robo-advisor.

So is Silicon Valley the future of investing? It depends on what you are looking for. But the industry is definitely transforming. You can now get a full-service shop with Personal Capital for less than a single average mutual fund.

Get an Investment Check-Up to see how your allocation stacks up.