Pioneering a roboadvisor the hard way

While working my first gig at the Lehman Brothers investment management division strategy group, I worked on a "custody fee" project. This was an initiative where the firm would charge people some minimum amount of fees in order to make unprofitable clients quit. My spreadsheet said that number was $5,000 per year, just for the privilege of Lehman's financial advice (ha!). The idea of "firing" small unprofitable clients was not odd to anyone at the time. A second observation was that financial advisors were meeting clients, taking paper notes, and then entering that information on software systems on their desktops, only to print out the results and take them back to the clients. These were staff being paid hundreds of thousands or millions of dollars. The reason we had to charge people $5,000 as a floor was that these humans are expensive. Why not put the software in front of the customer instead?

This observation is mundane today, with tons of investment and banking apps built for a mobile experience. At the time, it was heresy. Goldman Sachs would offer clients an asset allocation with 15 asset classes (e.g., value equities, international small cap, fixed income aggregate, TIPS, commodities, real estate, hedge funds, structured notes) and demand that the client have at least $5 million in assets to join. Today, you can get as smart an asset allocation from any app, with as many asset classes, at 30% of the price, delivered in real time to the device of your choice. Goldman itself has moved hard into the Fintech space with its digital lender and neobank Marcus, its acquisition of Clarity Money and Honest Dollar, and an inevitable retail bend to its brand. Times change.

In 2009, these ideas combined in my mind with the progress of Mint.com, a leading data aggregator in the mid 2000s, and the success of freemium models across Silicon Valley startups. By 2012, people starting calling this theme "a roboadvisor" or a digital wealth manager. Ours had always been focused on the mass-affluent market (akin to Personal Capital) as the most under-served niche of people who would like to delegate their financial decisions. We would give away for free (1) risk assessment and generic asset allocation, (2) light financial planning, and (3) net worth data aggregation -- and we would charge for investment management itself. Below are my pitch slides to Columbia class-mates to help me build up what would become NestEgg Wealth.  


Going from Alpha to polished app

The first several months of NestEgg were a whirlwind of late night design and coding with my co-founders, Ben Zhuk and Brooks Paige. We went from a cheesy golden-egg clone of startup websites to a more balanced, institutional design. The web app focused on proving to a prospect why they should automate their financial advice by comparing their current situation to outcomes from a proposed allocation. We wove the comparison of current vs. future throughout the financial planning, data aggregation, and investment selection sections. This allowed the features to "sell" themselves.

The other smart thing we did was spin up a marketing site with a waitlist, which let us build an initial (small) pipeline of demand. Once the alpha was ready for input, we got folks to go through the onboarding process, which ended in a survey. Building customer feedback loops into the workflow -- from design to functionality -- was an early lesson in product design. You are not your only audience, so intuition will only take you so far. Capture feedback, and burn down your assumptions.

In having prospects flow through the demo, we learned some meaningful and lasting information. Of our audience, 20% wanted more numbers, data, and analytics. They found Sharpe ratios and volatility figures to be insufficient -- bring on Sortino ratios and downside volatility! This "pro-sumer" niche was the worst, and the most likely to consume tons of features without ever paying for delegated wealth management. Covestor, Wealthfront, Portfolio Monkey, Motif Investing, and many others will have fallen into the trap of trying to serve this audience. The other 80% of our visitors found the experience to be too sophisticated, too confusing, too intimidating. They wanted less information and fewer charts, and this was the very reason why they were looking to purchase a solution for their investment needs. Going simple is the only way for B2C fintech.

Product-Market fit with Content Marketing and Private Label

Humans make decisions based on stories, and we built NestEgg Magazine (pictured above) to be the content marketing arm of the company. The tone of the content mattered. I still remember a Mint.com article that was our counter-example: "Should you buy or make your own catfood?" Mint's audience needed budgeting advice, and the savings from feeding your pets leftovers solved a problem for their audience. For our audience, we needed to take a data-driven approach, supported by visualizations, to inform prospects on the right approach to managing portfolios. Our design was inspired by the Economist and (gasp!) Slate.

Over time, we found that many of the Contact-Us responses to content and new demo users were not regular people looking to invest. They were small and medium sized investment management firms, and their operations or technology staff, poking around for better ways to serve their own clients. After having a frustrating time in 2012 trying to sell our software as a service to the big banks (e.g., Goldman, Morgan Stanley, UBS, Barclays), I was taken aback by this interest. With some research, the difference between independent RIAs that serve most of the country and the wirehouses became clear. And so our pivot into private-labeling the software for RIAs, and working with custodians like TD Ameritrade, began. Instead of chasing new clients and paying massive customer acquisition costs at a loss (hey there all of Fintech), we went to where the clients already were. By introducing a self-service model to this channel, we helped them build more lasting business. And they could start to tell a story about innovation, the inter-generational wealth transfer, and enterprise value. 

By the first month of 2013, the firm had more prospects than the cumulative sum of my pitch meeting in the three years prior.


FedWise Financial Literacy Chatbot

In 2012, we had also acquired FedWise, a financial literacy question and answer engine that was deployed on community bank websites in a stock for stock transaction. An opportunity to put some of my lawyering to work! The founder and I had immediate alignment on the role of technology and data for the long tail of small financial institutions. In the same way that Registered Investment Advisors needed to private label digital wealth solutions and the rest of their software from custodians, small banks and credit unions rented technology from the bank core processing system providers. Fiserv, FIS and Jack Henry own the market -- and FedWise had a contract with Jack Henry to be part of their conferences and distribution. 

The product was ahead of its time. A few lines of code were inserted into the HTML of a bank marketing page, and a popup chat-box appeared to the side of the screen. That box was connected to a database of over 3,000 researched questions, like "What is a mortgage?", that customers would enter when interacting with the bank. Over 100,000 people loaded the question box monthly across 25 separate bank clients.  We thought that financial literacy could be the "content marketing" offering of NestEgg, sold to both advisors and banks, and private label digital wealth would be the upsell.

Looking back at it, I missed a clear opportunity -- or perhaps the market was not ready. Most questions asked were not about financial products, but about the times that the bank was open, their product pricing, and similar customer-specific questions. We just emailed those to bank staff. Two types of companies have since been built that are meaningfully valuable leveraging such demand. Intercom is one, and it integrates chat functionality across industries in a similar way. Finn.ai and Kasisto are another, building chatbots that have smart pre-built conversation and NLP woven into their engines. If only we had more time and funding, I think we would have connected the dots. 


Strategic review and current status

Today, the major theme for product-based B2C fintech companies is to re-bundle services to combine banking, lending, payments, messaging and investing. In 2013, the un-bundling was not yet done and a race for customer acquisition was in play. Three choices were available: (1) large venture backing for building a brand, (2) renting that brand from a media company, and (3) integrating into platforms where the customers already lived. I tried hard at all three, with 15 months at one point dedicated to launching a Forbes-branded B2C roboadvisor. The most tangible and scalable model, however, emerged for us in the third option. 

Around this time, I began partnering with the founders of AdvisorEngine on thinking about a digital-first wealth management platform. What if in addition to the emerging digital channel, we also powered the rest of the traditional practice? After a time of mutual client development and discovery, joining forces became the clear win-win, and by 2014 NestEgg was acquired by AdvisorEngine. 

To learn more about AdvisorEngine, as well as access its  products and services, I recommend you contact the team here.

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