ETF.com: Tell me about the investment process behind your ability to offer this level of certainty. Ellevest uses an algorithm to assess client preferences and risk tolerance, right? What goes into this algorithm?
Kwan: We don’t start with a risk questionnaire. We don't ask the typical questions, “If markets fall 20%, what would you do?” and that kind of thing. We found most women really don't know how to understand that. It's unclear whether those are effective means of determining someone's risk tolerance or risk preference.
We take a measure of what we're calling “risk capacity” that is goal-specific, and we've collaborated with Morningstar in the asset allocation and the methodology and the algorithm. Say you were saving for an emergency goal, for example. That is sacred. You shouldn't take any risk with that, so it's going to be 100% in cash so that it's liquid and there when you need it.
But say you want to save for a vacation you’ll take in five years. That’s more of a discretionary goal. For something like this, we've created short-term goal-specific portfolios that are based on, first, the time horizon of the goal, and the risk capacity of the goal. In these portfolios, you can afford to take more risk.
And for your retirement, there is an algorithm underneath that actually looks at things like your earnings power. We look at human capital, and balance that with the assets you currently have to determine the amount of risk that would be appropriate for you.
ETF.com: And all of this information goes into creating one portfolio, one asset allocation plan, customized for every individual?
Kwan: Yes. But it's not necessarily a single portfolio. It’s a holistic investment plan. We recommend specific portfolios for each goal.
ETF.com: Are you outsourcing any part of the portfolio management?
Kwan: We don't outsource. We do collaborate with Morningstar, and we license the Morningstar forecasting engine, which is fully integrated into the Ellevest algorithm. We've also collaborated with them to determine both the asset allocations and the specific ETFs.
ETF.com: Are you using only ETFs? Or are you using mutual funds as well?
Kwan: We are currently using all ETFs, except for the emergency fund, which is just FDIC cash.
ETF.com: Are you issuer-agnostic, or do you have specific issuers you're working with? And how do you select ETFs?
Kwan: We have a few ETF families, many of the same ones other advisors use: Vanguard, iShares. We also use VanEck. And for our retirement portfolios, we have a small allocation to commodities; we use the First Trust Global Tactical Commodity Strategy Fund (FTGC | C) for that.
ETF.com: Is there an account minimum? And what are the fees to invest with Ellevest?
Kwan: There is no account minimum. And the fee is 0.50%, which is not the cheapest out there, certainly. There are other digital advisors that are half that, or even lower.
But we do believe we add a lot of value. A woman can get an investment plan for free, so they don't have to invest a penny with us to get value. And the holistic approach matters. A woman can say, “I want a house and I want to retire and I want to build a business. I don't have the resources to do all three. But what if I wait two years to buy a house? Does that mean I can start my business a year earlier? Or what if I save a little bit more toward my house?’
The ability for her to customize her plan by adjusting one goal and seeing the impact on all the other goals in her plan is very powerful. That’s what we offer.
ETF.com: Is there a particular demographic you’re focusing one? Or could men invest with Ellevest too?
Kwan: Although our service is specifically billed for women, it is not exclusive. If men wanted to use our service, we wouldn’t kick them out. It's really open to everyone.
As far as demographics, initially we were thinking this would be best for women between 30 and 50, in the prime of their careers. But we have now women clients from age 20 to well over 60, which was surprising. So we're not targeting any type of age group or demographic.
ETF.com: What do you see as the biggest challenge to starting a new robo advisory today?
Kwan: It's a great question. The biggest challenge, really, is getting the word out, and getting the word out about what's different about you. There are so many robo advisors out there today, and clearly there are some frontrunners who have gotten a lot of visibility, like Betterment and Wealthfront, Schwab and Vanguard.
Many others are jumping in now, and without a big name, it will be difficult to get the visibility they need, and to help potential investors understand their unique value proposition.
Contact Cinthia Murphy at [email protected].