It’s beginning to get extremely interesting in online investing.
Last week, Nick Shalek, Leigh Drogen and Josh Brown penned posts that drove ten foot waves into the archaic investment management fortress. These three highly experienced and articulate observers carefully spelled out the main issues driving innovation in online investing, and while Shalek, Drogen and Brown disagree on some points, they agree that we’ve reached an important inflection point in this multi-billion dollar industry.
As CEO of Covestor, an online marketplace for investment management, I’m thrilled to see this discussion gaining broader attention. It’s about time - our industry badly needs shaking up. Here’s a recap of the debate and how I see this all panning out.
In a long and well-written post on TechCrunch last week, Shalek urged investors to avoid any kind of active or personalized portfolio management in favor of the new web-based asset allocation services of the sort our startup peers Wealthfront, Personal Capital and Betterment now offer.
Drogen, founder of Estimize, replied that while the asset management business is in desperate need of disruption - and that these new web-based services have great potential - the current batch suffers from a fatal flaw. They all rely on Modern Portfolio Theory, and as Drogen sees it: “MPT is a bankrupt ideology that has been proven false.”
Then Brown, a NYC-based wealth management adviser and popular blogger, weighed in that in his opinion, passive, software-based investing can indeed be the best solution for some investors, but that individuals with larger accounts will always seek a human adviser’s touch. Moreover, Brown’s convinced that smart active investing absolutely does add performance value: “you can't trust machines implicitly in a world where policy and politics have replaced economics... Software is good, [but] smart people employing software is better.”
Who’s right? I think they all are. Each defines a legitimate need and a product to meet it. But what investors really lack is a framework - a marketplace - to assess and access all of these products in the same way we do for some of the most important things in our lives today: jobs, doctors, even life partners.
In particular, investment management needs an online, client-centered marketplace, where an investor can define what her needs are, sort through the full range of methodological options available to her to meet those needs, and find dozens of managers competing for her business within each product niche.
I’m convinced that internet-based services will radically disrupt the closed, inefficient market of investment management, but as they do so, some fundamental investor needs must be addressed. Among these needs:
1) The requirement to personally define, in a careful, independent and assisted manner, what level of risk an investor should take on in the effort to meet their long term financial goals.
2) The freedom to choose among a number of investment strategies that share that risk level. No single investment methodology is right for everyone, even within a given risk category.
3) The ability to assess multiple managers and methods in a fully transparent manner - their prior performance, their investment process and thinking, and their fees.
So if an investor determines active management with a certain risk profile is right for him, he can choose among talented managers with verified track records who share that goal (with their own money, too). If Modern Portfolio Theory, with all its pluses and minuses, seems right for him, he can plug into a MPT model. And if he wants a high yield portfolio with careful oversight, multiple managers with a range of approaches to that goal should be available for him to choose from.
Only a well-structured online marketplace can satisfy all of these needs, for the full range of the investing public. So that’s what we’re building at Covestor.