A new analysis of online investment startups suggests that websites offering computer algorithm-based investment advice are the most likely to shape the investment industry.
An Oct. 29 report by Corporate Insight, a New York City-based research firm, evaluates a rash of more than 130 startup online financial companies, ranging from those that provide investment advice, to those that offer real estate crowdfunding or tuition-financing alternatives.
Analyst Grant Easterbrook writes that a dozen or more of the algorithm-advice sites that have popped up in the past couple of years and attracted millions in venture capital have the best potential to impact the investment markets because they address "the lack of affordable, objective and rigorous portfolio analysis and investment advice."
Firms like Jemstep, Personal Capital and SigFig may attract young investors with business models that use computer algorithms to manage investment funds for better returns and lower fees than traditional models offered by brokerages and financial planners.
Today's Business Record magazine features an article about these firms.
Easterbrook's report notes that the key strengths of innovative startups include: transparent and affordable pricing for investments and portfolio management; more consumer-friendly presentation and better performance tracking; and passive index investing. The report cites a 2013 Morningstar Inc. report that notes that passive investment funds have been gaining market share from actively-managed funds for several years.
However, the online firms have some significant hurdles to overcome with customers, he said. Key is a lack of trust by consumers. "It's one thing to buy a book or a t-shirt from an e-commerce site - it's another thing to trust one's life savings with a small company that has no track record and next-to-no human element," Easterbrook writes.
The second question is how the online financial services firms will fare in a down market, given they've only operated in the broadly rising market of the past few years. In a market crash, many investors would leave the market, leaving these startups struggling to repay their venture capital investors, Easterbrook said.