The Derivative Project

Hello New York Times: Please Define “Conventional Money Management”

Hello New York Times: Please Define “Conventional Money Management”

Hello New York Times: Please Define “Conventional Money Management”

The New York Times is doing a disservice to every retirement investor in their recent review of the “Robo-Advisors”, “Sites to Manage Personal Wealth Gaining Ground”

The New York Times states:
“The biggest selling point is that these relatively new sites are often far less expensive than conventional money managers, who generally charge 1 percent annually on assets under management and scale down their fees the more money clients have on deposit.”  They then go on to quote a “financial planner”, not a “conventional money manager.”  They are mixing apples with oranges, that does nothing to assist a retirement investor on how to make an informed choice on how best to manage their nest egg.
What is Conventional Money Management?
Is the NYT speaking of a “money manager” or the “new” planning/advice industry that just developed over the last few decades with the advent of defined contribution plans?  They fancy themselves as “investment advisers” or “conventional money managers” without the pedigree, without the fiduciary role and without the experience in selecting investments or “running money.”
Yes, a typical financial planner, may or may not have a college degree, no training in designing portfolios, and is not a “conventional money manager.”  They are financial intermediaries that put your retirement nest egg with a “conventional money manager.”
Betterment is comparable to a dually-registered broker/SEC registered advisor –they charge a fee for “advice”, but the accounts are non-discretionary.  Once they sell product, legally, they have no further responsibility, so one has to stay on top of what one purchased, since Betterment has no legal duty to continue to monitor the portfolio.  
Wealthfront, however, goes a step further and has discretionary accounts, so they would be comparable to a “conventional money manager”, charging a fee for advice and managing the portfolio.
The Wealthfront concept is excellent, the problem is their product, based on Modern Portfolio Theory.
The New York Times quotes financial planner, Mike Kitces, who clearly does not appear to understand the role of these new business models:
“I don’t like the way they market themselves as ‘advisers’ when their services are more narrow,” says Michael Kitces, certified financial planner and director of research for Pinnacle Advisory Group in Columbia, Md. “Ultimately, though, the biggest challenge for these services will be the next bear market. Will their investors bail without anyone to talk to, blowing up their business model?”
Wealthfront’s home page is very clear, as to what they do:  “We manage your investments for you.” Wealthfront fits into the class of a “conventional money manager.” Contrary to Mr, Kitces statement, Wealthfront does not represent they are “Advisers”, yet they are SEC registered investment advisers under the Investment Advisers Act of 1940.  
Pinnacle represents the “new breed” of advisor, that bundles services for a fee, that developed with the advent of defined contribution plans.  They charge annual assets under management fees to select mutual funds and ETF’s and they also sell insurance and financial plans to their clients.
So the benefit that Wealthfront is bringing to every retirement investor today is the concept of unbundling.  Let’s take a look.
Wealthfront charges:
 25 basis points for their money management services, in addition to the embedded ETF fees.
Pinnacle Advisory charges:
1.30% for $0.00-$500,000 Assets Under Management (AUM),
0.85% for $500,001-$1,500,000 AUM, 0.80% for $1,500,001-$2,500,000 AUM,
plus fees for the embedded mutual fund or ETF management costs.  They bundle their services, so one has no idea what they are paying for investment management.
So what the New York Times failed to point out, if a retirement investor wants to do a comparison
of a conventional “money manager” to the new “robo advisors”, one first has to unbundle the services:

Conventional Money Manager compared to New Breed Financial Intermediary, such as Pinnacle
Pinnacle:  Assume you had no financial planning needs last year, take your overall performance and compare it, less the asset under management fees, to a Not On My Nickel “conventional money manager”.
Wealthfront customers:  compare your returns after all fees to Not On My Nickel’s top researched “conventional money managers”.
Wealthfront, in the vein of a fiduciary, a conventional money manager, does publish their performance.
We compare Wealthfront’s performance to a Not On My Nickel researched “conventional money manager, a moderate allocation fund, which we believe is an apples to apple comparison:
Here are the returns for a Not On My Nickel researched “conventional money manager”, with a defined investment style that has withstood the test of time.  Their annual management fee is 71 basis points.  These returns are after all fees.
NAME    
                                                                 1 week *        1 Yr AR      3YR AR       5 YR AR             10 YR AR
PRWCX                                                     2.75%        17.19    11.86     17.63           8.71          
*Daily trailing total returns     
Based on the analysis of Wealthfront’s returns, compared to an actively managed moderate asset allocation mutual fund, PRWCX, we believe the SEC might want Wealthfront to remove from their home page the “advertisement” that their investment advisory service outperforms mutual funds by 2.1%.  It may or it may not.  In the case of Not On My Nickel researched funds, it clearly lags the researched mutual fund significantly, in all highlighted time periods.               
Not On My Nickel gives retirement investors the tools and training to compare the returns of one conventional money manager against another.  Let us know how your returns with Pinnacle Advisors, are, after their 1.30% fee compared to a Not On My Nickel researched fund.
Wealthfront is to be admired for taking on the high fees of the financial intermediaries, such as Pinnacle Advisory Group that manages retirement money, for we believe too high of fees, but you will not know it until they unbundle their services and break out the asset management from the insurance and “planning.”
It is not the new “Robo Advisors” that the financial planning industry needs to worry about.  It is Not On
My Nickel who is giving every retirement investor the tools and training to make an informed decision on how to go direct to the best and lowest fee “conventional money manager.”
Financial education in the workplace failed, since it was delivered by conflicted financial services firms, who have made it impossible to make informed decisions.
Every one is capable of selection the top performing balanced fund in the United States.  Not On My Nickel empowers you to take charge, with the tools and training financial services firms have not delivered, despite the mandate by ERISA there were to do so.