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July 25, 2014 at 11:02 AM
In a follow-up to a study released in April that found 11 of the oldest online financial startups managed a combined $11.5 billion, Corporate Insight found that in the three months since, those firms have added another $4.2 billion in assets.
Of the $15.7 billion at those firms, $12 billion is receiving paid investment advice, while $3.7 billion is directly managed by the firm.
Grant Easterbrook, an analyst for Corporate Insight and author of the report, suggested several reasons those firms grew 36.5% in three months. Some firms have recently shifted from free to paid services, he wrote.
Furthermore, established firms like Scottrade and TradeKing launching their own automated services lend legitimacy to the model, according to the report.
A preview of the report, “Transcending the Human Touch: Onboarding and Product Strategy for Automated Investment Advice,” outlined the onboarding process to show how automated firms overcome the drawbacks to not having an advisor to guide a prospect through the process.
For example, SigFig users link their brokerage accounts either by entering their usernames and passwords or entering data manually. The process boasts “bank-level security” throughout.
Once users finish aggregating their accounts, they can set their optimal portfolio based on SigFig’s risk questionnaire. SigFig asks users 10 questions and recommends an appropriate allocation, which it compares to the current allocation in their accounts.
SigFig offers a star rating for fees, risk and potential for returns of the two portfolios and takes this opportunity to direct users toward the firm’s managed account service, which charges 0.25% annually after the first six months. Users can choose to move any of their accounts — or any portion of their accounts — to SigFig. Documents are signed electronically.
Easterbrook noted in the report that it’s a mistake to assume all online advice providers use this account aggregation model. “Online services across many industries face the challenge of getting users to complete a transaction or enrollment before they get distracted or lose interest,” he wrote. “Automatic account aggregation can help overcome this by asking individuals for their usernames and passwords to access their financial information online – details that clients likely know off the top of their heads.”
It also reduces the potential for human error, a likely risk considering how tedious data entry is — not to mention the value to the user of being able to avoid manually entering data, even if they don’t make a mistake.
However, security and privacy protection will always be a prime concern in any online transaction. Especially for older clients, “it may seem unwise to provide their financial account login information to a third-party technology company,” according to the report.
