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Comment by solve | Hacker News Reader

This puzzled me that, for the past few years, YC has wanted so badly to invest in more or less traditional style wealth management companies. It's so extremely hard to outperform existing methods in terms of returns. For user experience, these are the kind of things that are best if totally automatic, with no interface at all.

So I guess they just compete purely for growth and that's it - like the commercials for popular drugs on TV, it's an industry 99% about advertising?

SV tech + extremely risk averse, mature, competitive space = doesn't seem to be a good fit.

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> This puzzled me that, for the past few years, YC has wanted so badly to invest in more or less traditional style wealth management companies.

There seems to be a strong belief in Silicon Valley that software is going to eat the fat margins in financial services and that there's all this potential for disruption.

The problem is that software's been eating financial services for the past 30 years and the fat margins aren't always as fat as they seem once you factor in things like compliance costs (or the demand curve is far steeper than you expect it to be).

Or once you factor in the profit motive and that the VC owners like margins & acquisition numbers to stay high. Quite a hard sell to convince investors to take higher risk on less money across the board. I'd never even attempt it.

Re: fat margins

A lot of that margin goes to the front line troops (whatever you want to call them-- brokers, advisers, planners, etc.) These are and have traditionally been charismatic people who were relatively high touch. If you think of them as providing a service to customers than they look like a massive cost center and the businesses that employ them ripe for disruption. But if you look at them as a sales force the picture becomes much clearer. Morgan Stanley wealth management has Bob who plays pickup basketball on the weekend with a bunch of doctors. What does Wealthfront have -- an ad on Yahoo finance?

My guess is that at some point these companies will pivot to trying to be the backend to a bunch of independents or small shops out there hitting the pavement. The customers will still end up with the 1-2% wrap, the robo-advisers will still end up with their .25% cut, but at least the customers won't be being put in high fee actively managed funds. So they'll be some improvement over the status quo.

So let's say Broker Bob's 200k of salary + expenses is buying you 10 doctors per year -- 20k per conversion.

I'm pretty sure the cost per conversion for your ad on Yahoo Finance is going to be a lot cheaper than Bob's 20k.

>My guess is that at some point these companies will pivot to trying to be the backend to a bunch of independents or small shops out there hitting the pavement.

It is already happening. See: Betterment Institutional, Schwab Institutional Intelligent Portfolios, and Motif Advisor

Additional issue is how these companies come about. They seem to be dependent on backtests to see if their secret formula works. While this approach might be workable in coding, it is not so straightforward in finance. As pointed out in the blog:

>But again and again, Wealthfront tries without blinking to draw a straight line between tax alpha and cold hard cash. For example, they offer a chart titled “After-tax Price Return of VTI vs. Direct Indexing” that appears to show that if you had merely flipped on Direct Indexing in 2000, you would have earned ~2% compared to losing 9% with Vanguard’s ancient index fund technology! They appear to reach these numbers simply by adding the maximum possible tax alpha to VTI’s return.

What Wealthfront did not talk about is - with S&P500 component stocks changing, so will the portfolio. It would need to rebalanced and constituted causing brokerage and other charges. While in hindsight it looks great, the actual trades during live environment could have been different.

Oh, I'm sure that startups know very well how poor and incomplete that methodology is. They just present this non-forward tested approach to fool the end users who don't know any better.

To me, the real question is to why VCs are interested in these kind of businesses at all given the scale they must achieve in order to make any money.

Even if they took 0.25% from the $1b they've got under management and they took 0.25% across all of it (which they don't), that's $2.5m. At $10b under management, they're making $25m - not exactly blowing the roof off from a VC point of view.

Now, the argument they make is "we will sell them other products and services" - but that, to me, is wishful thinking. Especially with the big boys like Vanguard and Schwab coming in in a big way.

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