Openness, transparency drawing investors to robo-advisers over Wall Street banks

CEO of Personal Capital sees investors choosing new options over the old due to fee transparency, focus on customer's best interests

Jul 27, 2015 @ 1:46 pm

By Bill Harris

In Jamie Dimon's latest letter to J.P. Morgan's shareholders, he warned that “Silicon Valley is coming” for the financial services industry. These words, which reverberated across Wall Street's boardrooms and trading desks, were followed by a promise that J.P. Morgan would respond to the growth of technology by making traditional financial products easier to use.

While Mr. Dimon's assessment is accurate, there's a bigger picture point that he misses. Making traditional financial products easier to use won't help Wall Street beat back the onslaught of financial technology startups.

Yes, everyone loves the convenience of well-designed, user-friendly apps, but the reason why droves of individual investors are ditching the big banks for tech-driven alternatives is about a lot more than ease of use.

(Related read: Robo-advisers want to plan your clients' future)


The real story is about the culture of each community, about transparency vs. opacity. For generations, big banks have profited by charging customers fees, fees that sometimes customers don't even realize they are paying. The culture on Wall Street is also sales-driven, whereas most startups are formed in response to developing new solutions to customer problems.

People are choosing new options because these solutions are transparent about any fees and in many cases save customers money and provide better service.

A good way to see the difference between Wall Street and the tech community is the debate over the Labor Department's proposed fiduciary rule. It's hard to imagine any company openly opposing a rule that requires them to put their customer's interest first, yet the financial services industry derailed this proposal five years ago, and now they're back at it again.

SIFMA, a leading lobbying group for Wall Street, expressed concern that the fiduciary rule could “limit investor choice,” implying that forcing advisers to act in the customer's best interest would drive many out of the market.

Paul Reilly, chief executive officer of Raymond James, took the rhetoric a step further, claiming last month that the proposal “will leave millions of people without the advice they're getting today.”

In reality, there are many independent financial advisers that already adhere to the fiduciary standard. They have no problem earning a living while putting their customer's interests first.

There are signs that Wall Street is attempting to adapt and become more technology and customer-friendly. The most notable among these efforts is Charles Schwab's new automated portfolio service, Intelligent Portfolios, which purports to be an ultra-low cost option in the new wave of robo-advisers.


That said, the service seems to follow the typical Wall Street fee model. As Adam Nash, CEO of Wealthfront explains, Schwab's product comes with 14 pages of fees that could deprive a 25 year old of more than half a million dollars at retirement.

Companies like Wealthfront, Betterment, or my firm, Personal Capital, all have slightly different approaches to wealth management, but I believe it's fair to say that we're united in the belief that everything starts with openness and transparency. Unless Wall Street realizes that these are the fundamentals of advising customers, people will continue to choose the new options over the old.

Bill Harris is chief executive of Personal Capital.


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