Malkiel: Cheap Money Advice For The Wired

December 10, 2012

In a wired world, could an online financial advisory firm end up ruling the roost?


Burton Malkiel, the Princeton economics professor and author of the index investing classic “A Random Walk Down Wall Street,” has a new gig that’s worth taking measure of. The legend of passive investing is now chief investment advisor of Wealthfront, a Silicon Valley-based financial advisory firm that is serving up a dirt-cheap online approach to money management.

Malkiel told Managing Editor Olly Ludwig that he sees the “wired” clientele at the core of Wealthfront’s business development plans as a crucial piece of the new company’s success. After all, what population could more readily embrace the virtual connectivity that allows Wealthfront to charge so little for its services? How little, you may be wondering? It’s free if you have less than $25,000 in assets, and just 0.25 percent for everybody else.

All the cutting-edge technological bells and whistles notwithstanding, Wealthfront is founded on the principles of index investing, which is why Malkiel is involved at all. But the technology makes some of those tenets—such as rebalancing and even tax-loss harvesting—much easier to implement. Moreover, lest you think taking humans out of the equation is a mistake, Malkiel argues Wealthfront’s algorithmic approach might be exactly what investors need to keep portfolio-destroying emotion at bay.


Ludwig: The whole money management business seems in some ways to consider only the wealthiest to be worthy of its time and effort. When I was at Smith Barney, I was discouraged from prospecting young associates at Boston law firms who were earning $250,000 a year—many of whom would end up being partners with substantial assets. That shocked me. I don’t mean to be blind to the realities of wire house economics, but I came out of that thinking there’s a flaw in the traditional business development model. Wealthfront seems to confront that flaw by not turning away even the smallest amounts.

Malkiel: I can understand why your sales manager would say: “Hey, wait a minute, these guys don’t have enough money to pay your bills; don’t worry about them, just worry about the big fish who might give you enough commission income so that you’re in good shape right now.”

But that’s been the mindset of Wall Street, and that’s been the mindset of a lot of business. But I think you had a terrific idea: These lawyers, who are associates and are busting their tails, at some point are going to be partners, and I’m sure they appreciated that you’d spend time with them, even when they didn’t yet have huge investable assets. But that’s a real blind spot that I’ve seen so often on Wall Street.

Wealthfront is taking this to a real extreme in that people with less than $25,000 are going to get the service for free. So this Wealthfront idea is not only doing good work for people, but I think it’s one that’s going to turn out very well in the long run. A lot of those people are going to have significant assets later in life. I think that’s a terrific way to build a business, and I really like your anecdote.



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