There was an article in Reuters last week about this concept that I call new media investing. Financial advisors have had a rough go of it for about the last decade. Not only has the market experienced two tremendous downturns with one of those involving their own industry, but the financial advisory model has literally been repriced. Margins have come down significantly due to the advent of online trading for a few dollars per trade, and access to free research and information due to the internet has helped to educate and empower the individual investor.
Now, something even greater is evolving and it threatens to once again dramatically change the financial advisory landscape. New media investment platforms are popping up everywhere on the web. New media investing provides investors with an opportunity to access many of the same portfolio strategies that a financial advisor would offer, in many cases for a fraction of the cost. After experiencing significant portfolio declines, investors have been seeking trustworthy, credible, and lower cost alternatives to either replace or supplement their existing financial advisor relationships. Now investors have a a “do-it-yourself” with help alternative which ultimately could be a huge threat to traditional financial advisors who manage assets.
MarketRiders, as mentioned in the Reuters article, is one of these new online platforms that leverages new media tactics to provide investors with a low cost opportunity to access a well-diversified, common sense portfolio. For $9.95 per month an investor can get a semi-custom, core ETF portfolio with periodic re-balancing recommendations. The portfolio is constructed based on modern portfolio theory with a focus on indexing. For most investors with portfolios under $500,000 or so, this is a solid offering. The additional costs? Well, the investor has to manually implement the trades in their own brokerage account which takes time and discipline, and there is no human element unless you are willing to pay up for a coaching service.
For most investors it is tough to stay disciplined and remain invested at all times, which can ultimately be costly. This is why indexing is great in theory but not as successful in practice. For any of these new media investing platforms to be effective and really help investors succeed, they must have a compelling communication strategy in place to keep investors engaged. They must be able to convince the average investor to “stay invested” through good and bad times. After all, most investors under-perform the market significantly due to the way they are wired.
I believe platforms such as Covestor Investment Management and Kaching may end up being the more interesting offerings simply because of the human element. With these two platforms the investor can actually follow a person, and that person has the ability to communicate with his or her audience through periodic updates. Allow me to disclose here that I am currently serving as a model manager for Covestor. I am fascinated by the fact that I can offer the same portfolio strategies that I employed with wealthy clients for 15 years and with one click, update all of my followers' holdings (more on this in a future post). In addition, I can put out a newsletter on the site once a month which outlines my current thinking about markets and the economy.
Although I cannot communicate with my followers directly on Covestor's Investment Management platform, they can get to know me through my individual Covestor profile, my monthly newsletter update, and they can certainly “google” me to get an overview of my background. This gives me at least some opportunity to keep my followers on board through the inevitable ups and downs in the market. Even though there is no real personal contact, my followers can potentially feel connected enough to me. It is similar to the way we feel we know a public figure. Even though we don't know them personally, our exposure to them can make us feel that we do.
The downside of these two particular platforms? I am still not sure it's enough to keep investors invested through good and bad times. I can't call up any of these investors who are following me and say “hang in there, this too shall pass”. Also, a management fee does exist as the client will pay an asset-based fee on any of the portfolios they subscribe to. However, these costs can still end up being significantly lower than working with a full service financial advisor.
What should investors focus on when evaluating a new media investment platform?
- What is the communication strategy and is it both personal and frequent enough to keep me from making emotional investment decisions?
- Is there an actual human being managing the portfolio that I can gather background information about and potentially connect with?
- Is the investment strategy sound? How much risk is taken to achieve the return? Risk-adjusted performance is key.
- Is there any hidden agenda? For example, a number of these new media sites are being developed by financial advisors who are trying to capture low cost, low revenue leads and convert them to full paying clients. Make sure if that is the case that all conflicts of interest are disclosed on the site.
- What is the investment strategy? If we really are in a “new normal”, will these new media offerings based on “modern portfolio theory” be sophisticated enough to help me take advantage of the rapidly changing global environment and all of the investment opportunities that may exist?
My advice to any investor interested in participating in new media investing is to start small. Don't put your entire portfolio with any of the online platforms. In fact, I recommend that if you have more than $250,000 in assets that you work in conjunction with a financial planner or advisor. You can set up small accounts with some of the new media firms and compare and contrast with what your advisor is doing. The more complex your situation is, the more likely you need a trained financial advisor to help with overall planning issues such as tax planning, and I would also recommend that you work with a tax professional.
The individual investor is certainly in the driver's seat and new media investment platforms are again empowering individuals to take control of their financial futures. It is still too soon to tell if these new media platforms can ultimately save investors from themselves. Most of us are wired to do the wrong thing at the wrong time and as a financial advisor for 15 years, it took a lot more than a monthly newsletter to keep my clients invested during tough times.