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Why Kaching/Wealth-whatever still sucks.

by on October 20, 2010


So, this morning I got an email along the lines of:

kaChing is now Wealthfront, and that’s not all!

[…] Increased Investment on the Platform: Over $100,000,000 is now invested on Wealthfront! This is an incredible accomplishment after only being in business for one year (and during a year where people are dumping stocks).

See I wasn’t planning on blogging today but rather spending some time catching up on Dexter (really, I’m not even going to qualify this with a link). But here I am, venting about how irked I am by this email – isn’t that what blogs are *really* for?!?

Now for those of you who don’t know Kaching‘s history – here’s a quick synopsis:

1. They started off as a facebook game where you could compete against your friends to bet on stocks that would do well – starting off this idea of “beating the market” (Anyone remember the ridiculous guitar playing Asian kid on the facebook app?)

2. They turned into a real investment platform where they let you follow other people who were considered “investment geniuses”, self-proclaimed investors (not necessarily professionals) who could “beat” the market, and could invest real money with these so-called geniuses. I still can’t believe SEC gave the green-flag to this (well, then again they did let Madoff slip on by for decades).

3. Thankfully, they realized that no one believed in their non-professional “investment geniuses” and then changed their platform to only cater to RIA’s (professional advisors) who were considered “investment geniuses”, again self-proclaimed professional advisors who could “beat” market

4. They then realized that the crop of RIAs on their platform was pretty crappy and as of last week had only $13,000,000 invested on their platform (not sure as to how the jump to $100,000,000 happened?!? let’s hope they added extra zeroes to all their accounts!). I guess Andy decided to rebrand again as Wealthfront (and FINALLY got rid of the ridiculous “investment-genius” terminology) or really Wealth-whatever, because it is the same thing but with a different look (much closer to FutureAdvisor’s, I must add) – way to go Andy, rip off a startup’s design!

The only common vein behind Kaching through all their rebranding and refocusing, thanks to Andy Rachleff‘s deep pockets (also to be noted – Andy’s ex-VC firm, Benchmark Capital, has not invested in Kaching…), is that their focus has been on “beating the market” – which really on it’s own is not a bad idea. It’s the execution that I have a problem with.

The biggest issue here is the obvious adverse-selection bias – if you can truly beat the market on a consistent bias using an active trading strategy, why the heck are you an RIA? Note that RIA’s only get paid around 1% of assets under management – so on a $5,000 account on Kaching, a RIA who can “beat” the market would make $50 while providing consistent returns of over 10%.

If an RIA is truly as good as they claim to be, why are they not running their own hedge-fund and charging the standard 2% management fee + 20% of profits or working for a prop-trading desk (even the douche fabulous-Fab from Goldman, who got sued, made over a $1M a year)? I mean really – even if you’ve just watched the Wall Street movies, you realize that the finance world attracts sharks and if you’re truly good – you’re not going to be going after the $5k accounts on Wealth-whatever.

So, Kaching doesn’t have the best money-managers out there – actually far from it, the money-managers on Kaching are, for lack of a better phrase, bottom-feeders.

The other misleading aspect to Kaching’s advertising is the underlying premise that these advisors are going to consistently beat the market. Now, note that in today’s day and age – there are perhaps 3-5 hedge-funds (most notably Renaissance Technology) that have consistently out-performed the market over the last couple decades.

No, these are not mom-and-pop shops trading over retail-systems such as Interactive Brokers but extremely sophistical investment houses who, not surprisingly, are only open to ultra-high-net-worth individuals (in fact, Renaissance Tech is closed to the public and only employees can invest in it). These funds are also run by incredibly brilliant people who have strong backgrounds in academia – think phD’s running the world. I’m sorry no amount of “research” published by advisors on Kaching makes me believe that they have any shot at being called academics or god forbid, “investment geniuses”. Also, who in the right mind believes that publishing research makes an advisor a better money manager?

So, if you do use Kaching – just be prepared to shuttle your money between one crappy investment manager to another racking up high fees and honestly, not that great performance at the end of the day once you account for the fees. You might have as well as just invested in a couple of mutual funds or ETFs to start with – keep it simple stupid!

I swear my rant is coming to an end (but really there’s nothing I hate more than faulty marketing and terrible execution!) but I will say a couple things on why Accevia is different. Not meaning to toot our own horn (hey, it is our blog!) but I would like to mention that even though we do have RIA’s on Accevia – we do NOT believe in actively managed strategies, i.e. we DO not believe in holding a large number of stocks and praying that the money manager will get the market timing right.

We believe in leveraging an RIA’s expertise in working with ETFs and mutual funds in order to carefully create portfolios consisting of low-fee mutual funds (yes, they do exist!) and ETFs (exchange traded funds – look it up noob, if you haven’t already!) that make far more sense if you’re investing $5k or even $50,000,000. In fact, even most high-net worth individuals and universities (including Stanford) are more likely to have ETFs and mutual funds in their portfolios in order to diversify.

I can guarantee one thing – no one from Stanford’s endowment or any other university’s endowment is using an advisor from Wealth-whatever to manage their money in order to “beat the market” but they are using ETFs and mutual funds, which, in my mind, makes the latter a much much better choice.


From → Personal Finance

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