New robo-adviser to collect management fees only when it beats the market

Instead of a basket of ETFs, SGIM's algorithm will actively pick individual securities.

A new robo-advice startup expects to attract clients despite the increasingly crowded digital advice market by offering a unique fee structure and investment strategy.

Instead of investing clients in a collection of index funds, SGIM’s algorithm primarily picks individual equities, with a side of fixed income to balance volatility. SGIM, which the firm said stands for Strategic Growth Investment Management, will only charge clients a 25-basis-point fee each quarter if it beats the market over that period.

It’s a business model not just unique to robo-advisers, but to most of the financial services industry. Alois Pirker, research director of Aite Group‘s wealth management practice, said it’s similar to hedge funds collecting a share of profits, but even they charge an ongoing management fee.

The idea of linking the company’s revenue to performance is a great idea, especially in a bull market, Mr. Pirker said.

“If they started it a couple of years ago, it would be fantastic,” he said. “It is a bet on yourself. If the markets go sour, you better have a good strategy.”

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SGIM co-founders Mitchell Wonboy, a J.P. Morgan and Fisher Investments’ alum, and Adam Forbes, a technology veteran, said SGIM’s algorithm is up to the task.

“We have a quantifiable, mathematic strategy to protect in a bear market,” Mr. Wonboy said. “The question I always ask is whether you believe your current adviser has a strategy in place for a downturn. More often, the answer is no.”

SGIM offers three strategies: U.S. equities, global markets and socially responsible. The domestic stocks are benchmarked to the S&P 500; the global investments are held up against in the MSCI World Index; and its SRI strategy is compared with the MSCI KLD 400 Social Index.

The robo must beat the benchmarks by 0.25% each quarter. If it does so all year, clients would end up paying a total annual fee of 1%; more expensive than other robos-advisers, but similar to traditional advisers. If the firm fails to beat the benchmarks, the service is completely free to investors that quarter.

Mr. Wonboy is confident SGIM will outperform often enough to generate a profit for the company as it starts attracting customers.

“Our own money is being managed by it,” he said. “We are active managers. If we don’t do what our intention is, then we don’t deserve to earn a fee.”

SGIM only has $8 million in AUM from 55 accounts since its launch early this year. The company, which requires a $10,000 minimum investment, hasn’t attracted venture capital funding yet, but Mr. Forbes said he is confident the fee structure will help the firm stand out from other digital advisers, which he said just repackages the sale of low-cost ETFs.

“We’re one of the few financial services companies with a unique value proposition,” Mr. Forbes said. “We wanted to develop a working model that we believe makes sense, develop a funnel we think makes sense, then go get money to throw kerosene on it.”

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Having a unique message or targeting a niche demographic is necessary for any startup trying to penetrate the digital wealth market, Mr. Pirker said. Other new robos have catered to opponents of President Donald J. Trump and video gamers.

Mr. Pirker said SGIM’s messaging proves its executives are willing to “put their money where their mouth is” and could resonate with consumers. And if the service is free during a bear market, it could help SGIM keep client money from running.

“On the other hand, the market is moving away from the ‘beat the benchmark’ thinking,” he said.

More people are thinking about achieving individual goals instead, Mr. Pirker said.

Sean McDermott, Corporate Insight’s director of brokerage research, agreed the approach is novel. However, he said the digital advice market might be too mature for a new player to break in.

“While SGIM’s unique approach may attract a segment of investors who have thus far spurned the digital advice model, it’s difficult to imagine them siphoning off existing digital adviser customers from competitors,” Mr. McDermott said.