How is ActiveAllocator Different?

I was recently asked ‘Yes, yes but how are ya’ll any different?”. Here is an attempt – albeit somewhat self serving – to expatiate 🙂

New opportunities draw market participants

The evolving FinTech landscape brings new opportunities: (i) self-directed investors struggling to effectively manage their portfolios; (ii) RIAs with challenges to engage and retain their customers; (iii) emerging internet-based financial services companies who are paving the path of innovation; (iv) cloud-based platforms that are simplifying software delivery; (v) open platforms and application-level developer ecosystems which are driving innovation forward; (vi) new technology platforms that are leveraging big data; and (vi) a large addressable financial advice and fulfillment market through technology driven mass-customization being created.

The landscape for online integrated asset allocation and portfolio construction which combines traditional and alternative investments provides a unique opportunity for a new entrant such as us. To the best of our knowledge there is no firm, other than that brings liquid and illiquid, active and passive, traditional and alternative investments holistically together – though multiple software vendors compete closely in the traditional asset allocation space. In absence of a player that has managed to create a positive externality, or content based differentiation, our proposition offers a low switching cost to the user. Our business, with truly superior content, combined with ease of use and access, faces an opportunity to stand differentiated and emerge as a leader.

We compete on the basis of several factors, including the breadth and quality of our long term strategic asset allocation, tactical allocation and portfolio construction services. Additional factors include the number of RIAs, independent broker-dealers and custodians that are connected through application programming interfaces (APIs) to our portal, the price of our investment solutions and services, the ease of use of our platform and the nature and scope of services that each client believes are necessary to address their needs. In our opinion none of existing market participants bring in the narrow specialized integrated holistic traditional investing and alternative investments focus that we do.

Some broad ‘competitor’ types are described below:

  1. Financial software firms. Many software firms, as they have morphed and grown have become all things to all people. Their offerings are most often geared to providing the applications and services advisors use to manage their practices. These include workstation based deployment for data aggregation and analytics; financial planning; portfolio management, trading and re-balancing; multi-custodial aggregated performance reporting; portfolio accounting, re-balancing and; client relationship management and billing calculation and administration. Within this category, we also include the traditional asset allocation software firms that provide software packages for conventional stocks and bonds using mean variance optimization approaches. Some also offer basic research and due diligence on traditional investment managers and funds. In general, most of them compete closely without a clear source of differentiation in content.

Our differentiator: In doing all of the above, many firms have lost sight of the single most reason that a client reaches out to a financial advisor in the first place – which is to create better investment outcomes. Our offering, by contrast, is intended for high-end sophisticated advisors focused on bringing cutting edge finance theory and computer science in a system that blends liquid and illiquid investing, as well as of anyone else doing this in the manner that we are.

2. Robo advisors. Robo advisors are part of the growing cluttered category of digital investment managers. Forrester Research notes that thanks to the rise of low-cost indexed ETFs, digital investment managers have the building blocks they need to assemble low-fee, diversified, and automated portfolios. Software startups for robo advice have been formed over the past three years and many have accepted tens of millions of dollars in venture capital funding to challenge the traditional financial advisor model. Their proposition is that by leveraging technology they can deliver financial advice to millions of people (the mass affluent segment) at lower prices and lower account minimums than incumbent firms. Examples include: (i) Digital money managers like to help users budget and pay back debt; (ii) Digital investment managers like Nutmeg, Wealthfront, Betterment, Ellevest, Riskalyze, Personal Capital, Future Advisor and a dozen others offer simple diversified portfolios to individual mass affluent investors; (iii) Digital financial advice platforms like SigFig deliver actionable recommendations based on an understanding of the mass affluent consumer’s financial position; (iv) Digital retirement plan advice platforms like Financial Engines guide users on how to get the most out of their retirement investments; and (v) Comparison engines have ended information asymmetry as consumers no longer have to rely on commission-driven agents, brokers, and advisors to find the best financial products and services for their needs. Firms such as Bankrate aggregate product information in personal finance, letting consumers specify their requirements to find the product that is right for them.

Our differentiator: These, unlike us, are meant for very simple traditional passive investing with access to very limited equity and bond asset classes (typically fewer than 15 versus over 50 that we offer). Not one of them address alternative investments or bring together asset allocation and manager selection for active managers. Not one of them is remotely as sophisticated as that what is codified in our algorithms and methodology. Moreover, they cater to aggregating small investors with a few thousand-dollar savings, unlike us whose offering finds traction with large RIAs who may have already aggregated hundreds of millions of dollars in client capital. Unlike robo advice we intend to create new value for individual affluent investors by democratizing strategies that have, to date, been available only to institutional or ultra-high-net-worth investors.

3. Private banks. Outside the independent broker-dealer and RIA channels some private bank platforms have set up in-house consulting divisions for managing high-net-worth portfolios, offering proprietary products and delivering advice (often, in our view biased) while charging large fees. The non-captive affluent investor does not have the attention of such full service firms.

Our differentiator: Most of these firms provide bundled asset management, wealth planning, investments, fiduciary and risk management services and are one stop shops. We believe that unlike them our advice is independent and objective for we do not draw revenue from soft dollars, commissions, captive broker-dealers, or referrals. Often these firms are self-focused driven by firm profitability, legacy operations/approaches with process limited to their firm’s products or deriving revenue from the third-party products they distribute. They have a standardized product-sales orientation, while we are product agnostic. Most of them have a lack of comfort with non-traditional asset classes. Our entire business model by contrast is built around bringing illiquid and traditional investing together to exceed client goals.

4. Asset management platform providers. These typically provide financial advisors with one or more types of products and services. However, they generally offer fewer choices in terms of asset classes to allocate to as well as restrict the usage of active management techniques.

Our differentiator: We are not wedded to products for our approach is driven by allocation and portfolio construction advice. We may elect to use multiple asset management platform providers for fulfillment, thus bringing benefits of multi-asset, multi-product inclusion to portfolios.

5. Custodians. A number of leading asset custodians have expanded beyond their custodial businesses to also offer rudimentary asset allocation tools that target the mass affluent segment.

Our differentiator: We do not think that they compete with our solution. Their entire approach is built around volume driven profitability, operational inefficiencies and scale. Our approach by contrast is about personalization, mass-customization and finding inefficient investment clusters that can provide skills based returns. Our value comes from intelligent active management derived from arriving at and taking purposive active investment decisions.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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