The Old-Fashioned Way
In the late 1970s, the actor John Houseman starred in a famous commercial for a well-regarded old-line investment manager of the time. There he is in his dark suit and bow tie, informing you that investing is hard work and that by engaging them as your financial advisor, you too could make money the old fashioned way.
Technology is revolutionizing and reconfiguring many industries, and the financial services space has certainly benefited from many technology innovations. But, up until quite recently, the wealth management and business lending spaces in particular have run pretty much the same way they did back when John Houseman was on TV. Let’s look at wealth management first and then tackle small business lending. In both cases, new technology companies are using software to enhance and open up products and services to a whole new audience, especially benefiting those with smaller and more straightforward needs.
The New Wave in Wealth Management – Online Advisory Platforms or “Robo Advisors”
The process of personal investment management has traditionally meant seeking out an investment advisor or trying to do it on your own with limited tools. In addition to the high fees for such personal advice, these investment advisors can typically have high initial minimums which can leave a new investor out in the cold.
Enter the “robo advisors.”
This is a really bad name for what may be the biggest innovation to hit wealth management in decades. Let’s instead call them “online advisory platforms”. Starting around 2010, a number of firms started developing online systems which use easy to visualize sliders for establishing a client’s goals and risk tolerance, and then using these inputs they automatically invest client money in diversified investment strategies. By using primarily Exchange Traded Funds, they keep costs and turnover down, and the system continues to invest and rebalance according to what their algorithms and calculators decide is the best risk/reward profile for the customer.
Firms such as Betterment, Wealthfront and FutureAdvisor now offer these platforms with taglines promising “premium investment management for everyone” and “sophisticated online financial advice”. While these technology-enabled services, with low or no human interaction, will be the first to admit that they do not provide everything that a personal financial planner and large investment firm might offer, they do offer a very easy starting point with no or very low minimum balances required and low fees.
Their graphical and simple user interfaces are ideally suited for younger, more tech-savvy individuals who may just be starting to think about investing for their future. In addition, these platforms allow you to start with hundreds of dollars to invest, not millions, and make it easy to get started. They offer a standardized, easy to understand model to save for one’s future.
These companies do not at this time provide what top financial advisors do – things such as coordinated estate planning, and tax and insurance planning. They also do not provide as comprehensive a process to help the client understand their funding needs and life goals. But what they are clearly offering is a new easy access point to help people start investing. A key tenet of any wealth management plan is START EARLY! And these new technology/financial hybrids give a new generation a new-fashioned way to do so. They have used software to transform the prevalent business model and open it up to the next generation.
The New Wave in Small Business Lending – New Non-Bank Online Loan Providers
Small businesses with a need for a quick cash infusion face a daunting task when looking to establish an initial lending relationship with a large bank. Similar to the case for small investors starting out, the barriers to entry for getting a business loan when you have a great idea or a small start-up business can be nearly insurmountable. Big banks just aren’t interested in small loans, or they may require more collateral than a small business has available. Plus, the administrative processes most banks have in place are too much hassle and usually end with a big NO afterward anyway!
Enter the online alternative lenders.
Starting several years ago, firms such as Kabbage, OnDeck and CAN Capital now offer the promise of a very fast lending decision based on a strictly online application and streamlined acceptance process. The fully online application typically takes only a few minutes to complete, and the loan approval algorithm is also usually completed within minutes. Funding can be done sometimes within one day. In the case of OnDeck, it has developed proprietary software to aggregate data about a business’ operations. An algorithm processes the data and determines whether or not the business will be approved for a loan. Unlike traditional bank loans to small businesses, OnDeck evaluates business performance rather than the borrower’s personal credit history. These services cater to small businesses with relatively small and short-term financial needs. Not surprisingly, those starting or growing online businesses find an online lender particularly attractive. So software has enabled a different way of viewing and processing business loans and has brought this to a new segment of the business market.
These technology-enabled lenders offer a new avenue for a new era of entrepreneurs. To be sure, this is a not a panacea and is not for everyone. These niche players focus only on short-term lending needs and do not provide the variety of services one would find at a big bank. In addition, they typically charge considerably higher interest rates than a large integrated financial institution would for a business qualifying under their more stringent credit standards. Also, some providers will require a personal guarantee to back up the loan, while other loans require payback of principal and interest throughout the loan, making the effective interest rate higher than a comparable term loan.
In this area, as with wealth management, new financial technology companies have found an underserved market and these companies are helping new businesses to grow through the innovative use of technology and a new lending business model.