The future of finance is self-driving money

https://venturegrit.substack.com/p/why-self-driving-money-is-more-important

by venturegrit • 7 years ago

90 83 7 years ago

venturegrit.substack.com

wizzwizz4• 7 years ago

This looks a lot like an advertisement. It's got over two screensful of "self-driving money is", like it's trying to drum a slogan into the mind of the reader.

jsinai• 7 years ago

Here again we have misaligned incentives. Banks optimize revenue when customers have as much debt as possible.
While expensive to develop, the beauty of software is it can be infinitely replicated. And at scale, the marginal cost of one additional user approaches zero.

So if I understand the article correctly, companies like Wealthfront can make money by signing up more users. Their technology scales so that marginal costs become zero and they earn an income from fees, so marginal profit also scales.

But in the long term is this enough? Surely their also needs to be an alignment along the lines of savings: if users save more and if banks can benefit from this, then everyone would be doing it.

Unsimplified• 7 years ago

In a 2 person economy, if person A stops cycling money back (thru trade not debt), person B suffers. Something similar happens in a 300M person economy, so I agree, self driving money would be a great solution.

danans6• 7 years ago

78% of Americans live paycheck to paycheck, and most Americans would struggle to cover an unexpected $400 expense. How did we get here? Why aren’t we doing better? Managing Money is Hard

We aren't here because millions of Americans didn't manage their savings optimally. They went to work, played by the rules, and saved what they could. We're here because the gains due to productivity growth for the last 40 years have increasingly gone to the to top wealth and income percentiles. That is the result of tax and trade policies changes that began in the 1970s and were cemented by the 1990s.

Meanwhile, concurrent with those changes, the cost of things that used to be "basics", like health care, higher education, and housing, have skyrocketed, while previously "universal" rights like good public primary education have been turned into lotteries. Society's capital has been sold to the highest bidder, and most of us have had no choice but to be part of that auction.

None of this is to excuse banks extracting revenue from savers via fees, or other similar practices pointed out in the article, but better management of personal financial capital won't be effective in helping people who can't cover an unexpected $400 expense, because those people have no financial capital to begin with, and due to tax policies designed to keep wealth in dynasties, their children likely won't have any capital either.

bluGill5• 7 years ago

there are doctors making $500k/year living paycheck to paycheck. There are people working fast food who manage to save money. It is a spending problem.

The things you list do not help either group, but the fact is most people spend every penny.

sdnlafkjh34rw5• 7 years ago

I don't believe it's purely a spending issue when things like childcare, education, and healthcare are growing at 2x the inflation rate. We have basic infrastructure costs in America that are spirally out of control that are really eating into wages.

gapo• 7 years ago

there are doctors making $500k/year living paycheck to paycheck.

Can you provide a source for that please ? Also, it would be interesting to find how much of their expenses are paying back their insanely high tuition-fees.

danans6• 7 years ago

there are doctors making $500k/year living paycheck to paycheck. There are people working fast food who manage to save money. It is a spending problem.

The existence of a statistically insignifcant number of counter-examples on either end does not negate the broader societal trend toward greater wealth/income disparity.

tmh79• 7 years ago

there are doctors making $500k/year living paycheck to paycheck

This isn't true, at least in any sense of the word we would agree with. (Wife works in medicine, is a doctor at this level, we run in these circles). They are "living paycheck to paycheck" in the sense that they've set their stock brokerage to automagically deduct 10k usd/month from their bank account, and they pay 10k/month on a mortgage (which accumulate equity) and their checking account doesn't grow in size and their monthly float is the same. Some of them pay for private school which means they only save 3k/month instead of 10k/month, how oppressive. Their checking account "funny money they allow themselves to spend on anything" isn't growing and is the same, but their net worth is growing 15k/month.

appleshore• 7 years ago

Except spending 60% of your income on rental housing is normal in major cities.

ativzzz• 7 years ago

A person making $500/k a year living paycheck to paycheck most likely needs therapy, not a financial advisor.

Shivetya• 7 years ago

because that number is a lie and the replies made by those questioned keeps getting changed and twisted so as to serve the purpose of certain politicians

Go read [0] the entire survey yourself. In particular search for EF5B which is where the number that get misrepresented time after time. People need to quit taking for granted what they read, it is being used more to manipulate you than inform you. It is really distressing how easily people on this site are duped, I know you want to believe it but please just stop.

///* Question EF5B. How would a $400 emergency expense that you had to pay impact your ability to pay your other bills this month Response Percent I would still be able to pay all of my other bills in full 85 I could not pay some other bills or would only make a partial payment on some of them 14 Refused 1

Note: Number of unweighted respondents = 9,670. Question EF5B. How would a $400 emergency expense that you had to pay impact your ability to pay your other bills this month Response Percent I would still be able to pay all of my other bills in full 85 I could not pay some other bills or would only make a partial payment on some of them 14 Refused 1

Note: Number of unweighted respondents = 9,670. ///*

[0] https://www.federalreserve.gov/publications/appendix-b-consu...

Miner49er• 7 years ago

What about question EF3? Most people said they would have to sell something, borrow money, or simply not pay it at all.

danans6• 7 years ago

There is plenty of data beyond the $400 response on the Fed survey to support the argument that income inequality has hurt the American worker.

But even the $400 emergency expense story is more complicated that you present it to be. From the Fed survey results:

----- Question EF3. Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense? If you would use more than one method to cover this expense, please select all that apply.

Put it on my credit card and pay it off in full at the next statement 33

Put it on my credit card and pay it off over time 16 With the money currently in my checking/savings account or with cash 45

Using money from a bank loan or line of credit 3

By borrowing from a friend or family member 10

Using a payday loan, deposit advance, or overdraft 2 By selling something 6

I wouldn't be able to pay for the expense right now 12

Other (please specify) 0

Refused 2

--------------

Note that the survey instructions ask the respondent to "select all that apply", hence the numbers don't add up to 100%. The total percentage of people who choses some combination of responses that don't involve paying with cash or an immediately paid-off credit card is up to 49%, perhpas somewhat less depending on the degree of overlap between the buckets.

That's a very large percentage considering what small amount $400 is. Even if there were a lot of overlap and the percentage were half, 24.5%, it would still be staggering.

And regarding Question EF5B, per the answers to Question EF3, many of those 85% of people who said would pay their bills despite the emergency expense, would be able do so only because they went into some form of debt to pay the emergency expense.

losvedir2• 7 years ago

I really doubt this. It just doesn't pass the smell test to me. You see people living paycheck to paycheck at many different incomes. If someone in a given location in situation is living paycheck to paycheck at $10/hr and someone else is doing the same at $12/hr, guess what? The latter person could have accumulated an emergency fund of $4,000 in a year.

No doubt there are people in real poverty, and no doubt some people get struck by a medical emergency, but there's just no way three quarters of Americans are in that situation. I'm old enough that I've seen way too many people living paycheck to paycheck that absolutely shouldn't be.

I think this article is 100% on point and clicked through to the services it was mentioning because it resonated so much with me. I was taught to save a percentage of my paycheck no matter what it was, which I began right out of college when I was making $28k/yr in Boston, and so I'm in a pretty great position now, but the article is right that it's hard and often confusing, and I would love for there to be a service that helps me along in this process.

uoaei5• 7 years ago

I was taught to save a percentage of my paycheck no matter what it was

This is part of the lottery. You were very fortunate to have been raised such that you are familiar with the ways in which money can work for you. Being born into a situation where this isn't the case is already a huge detriment, not to speak of actual hardships once you're on your way. It's not a stretch to think that even half of those people in paycheck-to-paycheck lifestyles are this way.

but there's just no way three quarters of Americans are in that situation

There is. Medical emergencies, as a contained example, are not isolated incidents -- when they affect caregivers, the whole next generation (or two! or more!) can be affected so heavily that the family essentially loses all their wealth in the span of a few years. More broadly, the community steps up to help out those in need, but often those in need are already in communities of need. One chink in the armor can drag down a whole network of people, and the strength of that can be unexpectedly high. If government welfare was more comprehensive and less difficult for poverty-stricken people to access (see: means testing and the time sink of waiting in lines), this would not be nearly as much of an issue. The "free market" sucks people dry if and when it gets the chance.

bena• 7 years ago

Your math is off.

The difference between $10/hr and $12/hr isn't $2. It's less because of taxes.

It comes out to roughly $2900 gross.

You also figure that if you're living paycheck to paycheck then you've met all of your needs. That's not necessarily true. The person making $10/hr could be skipping meals to last through the pay period.

They could also be skipping on preventative healthcare. Or some other thing.

And it also matters when you were making that $28K/yr. A dollar today is worth less than a dollar yesterday.

taigeair• 7 years ago

Maybe we can have someone from the credit card companies chime in with their thoughts. From my experience, I was shocked to hear cashiers at Walmart going to the Bahamas and staying at 4 star hotels, while I stayed on couch of an Airbnb that I split with my ibank and tech friends.

perl4ever• 7 years ago

Talking about a large cash emergency fund seems to me like a suggestion handed down from 50+ years ago. Why wouldn't a middle-income American these days just keep a minimum of ~$500-$1K in a checking account to prevent overdrafts and use a credit card if something unexpected happen? Over time, if you have a steady job in the $40-60K range, you can build up credit to the point where you have access to more than a year's income just via credit cards.

Is this "paycheck to paycheck" or not? If you have >$4K in checking at some times in a month, because you just got paid and you haven't paid your credit card bill, that's not technically an emergency fund, right?

I endorse your point that since there are people at all income levels who spend all their income, there's an inductive argument that nearly everyone can save.

Barrin92• 7 years ago

I'd like to push back on that somewhat. While it's true that the cost for a lot of basic necessities has gone up there is a lot wrong in American culture when it comes to lifestyles and savings.

The size of the average American home has approximately doubled since the 70s. This has driven up prices, increased energy cost, increased travel distance due to the constraints it imposes on density and so on.

There is no real explanation for why any given American would be worse off by doing away with this kind of consumption. The same is true for say nutrition. American healthcare costs are high, but Americans also live exceptionally unhealthy lives. They commute too much by car, they walk too little, they are too obese.

Americans also appear to love going out to eat much more than people in many other places, buy a new phone frequently, have a lot of subscriptions, and it adds up. Elderly parents are often placed in expensive care rather than taken care off by families, students go to expensive colleges and pay rent instead of living at home and attending a local public university, and so on.

You can talk a long time about the inequality in the American economy and the fruits of labour, which are indeed less evenly distributed than in other places, but this doesn't change the fact that given the standard of income and wealth of the average American household, everyone could live insanely more sustainable and financially secure lives by adopting a different culture.

danans6• 7 years ago

this doesn't change the fact that given the standard of income and wealth of the average American household, everyone could live insanely more sustainable and financially secure lives by adopting a different culture.

I wholeheartedly agree, but the reality is that, today, unless you are willing and able to pay a large premium for "luxuries" like walkable neighborhoods and workplaces, the average American gets market segmented into the excessively large housing and excessive long commutes with no transit options.

The best way to address the underlying lifestyle issues is to make healthier lifestyles more affordable, but there are a large set of interests, from advocates of exclusionary zoning in city councils, to the fossil fuel industry lobbying heavily against good public transit, who are arrayed against any of the positive changes you suggest.

AWildC182• 7 years ago

I think it's also worth noting that yes a lot of people want huge homes and conspicuous consumption, but that group is pushing up costs on everyone else who doesn't. Housing costs are growing massively as a fraction of income so with incomes stagnant, every year people have a little less to pay towards what they need and want beyond just having a home, regardless of size.

dcolkitt2• 7 years ago

Meanwhile, concurrent with those changes, the cost of things that used to be "basics", like health care, higher education, and housing, have skyrocketed,

The economic data simply does not support your argument.

In aggregate healthcare only constitutes 8.1% of US household expenditures. Education only constitutes 2.3%. It's simply infeasible that inflation in segments constituting less than one tenth of household expenses has crippled the majority of US households. Especially given strong deflationary trends in autos, apparel, furniture, appliances, consumer household goods, electronics, phone service, natural gas, toys, and media. Which in aggregate represents over 30% of household expenditures.

Shelter at 19.2% is a major expenditure item. But you're wrong that there's been significant inflation. The median price per square foot of American housing has not increased in real terms since 1992. (HN tends to be grossly misinformed on this since the community is heavily concentrated in the ultra-expensive Bay Area.) And this doesn't even account for mortgage rates falling by 60% since 1990.

It's true that Americans on average spend more on housing. But that's because modern homes are substantially larger than they were a few decades ago. Moreover the price per square foot metric doesn't reflect significant aggregate quality improvements like central A/C, better fire safety, higher capacity electrical circuits, more bathrooms, higher ceilings, better insulation, attached garages, and swimming pools.

Altogether the housing story does not reflect your broader thesis. If Americans were feeling overwhelmed by out-of-control housing prices, they wouldn't keep buying bigger and bigger homes. Other statistics tell similar stories. A record number of people are getting cosmetic surgeries. If healthcare costs were crushing US consumers, we wouldn't expect huge growth in Americans choosing to have elective medical procedures. It'd be like claiming there's an ongoing food shortage, while obesity rates are rising.

[1] https://www.bls.gov/cex/2018/combined/age.pdf [2] https://www.census.gov/const/C25Ann/soldmedavgppsf.pdf [3] https://www.aei.org/carpe-diem/new-us-homes-today-are-1000-s... [4] https://eurekalert.org/pub_releases/2019-03/m-nps030719.php

SQueeeeeL2• 7 years ago

Big houses are all that's built and is on the market. You can't buy apartments in anywhere except New York and Seattle. They also cant't build mixed housing that isn't single family homes in most cities because of zoning laws.

danans6• 7 years ago

In aggregate healthcare only constitutes 8.1% of US household expenditures.

Why do you think is 8.1% a reasonable number? Meanwhile, average annual health insurance premiums for employer plans for the last 2 decades have gone way up [1].

A significant portion of that increase has been paid by the employer, masking the increase in costs significantly.

Education only constitutes 2.3%.

Education expenditure here is being masked by the debt used to finance a great deal of it, from student loans, to credit cards and home equity loans (often on a parent's home) [2]

The median price per square foot of American housing has not increased

People don't buy housing in units of square feet. They buy access to shelter for themselves and their families near work, educational, and other advancement opportunities. The price of that access has increased, even outside the Bay Area.

the price per square foot metric doesn't reflect significant aggregate quality improvements like central A/C, better fire safety, higher capacity electrical circuits, more bathrooms, higher ceilings, better insulation, attached garages

Most of these features are commodified to the point that they aren't reflected in price differences much at all. What increases prices are exclusionary zoning laws designed to inflate property values.

A record number of people are getting cosmetic surgeries

$16 billion spent on cosmetic surgery [3], out of $3 trillion spent on healthcare overall. That's .5%. The vast majority of people are not getting cosmetic surgery. It's statistically insignifcant compared to overall healthcare costs.

It'd be like claiming there's an ongoing food shortage, while obesity rates are rising.

Except nobody claims that there is a calorie shortage. You're using a straw man.

1. https://www.kff.org/report-section/2018-employer-health-bene...

2. https://www.investopedia.com/student-loan-debt-2019-statisti...

3. https://www.plasticsurgery.org/news/press-releases/americans...

uoaei5• 7 years ago

better management of personal financial capital won't be effective in helping people who can't cover an unexpected $400 expense, because those people have no financial capital to begin with

One of the biggest tells for who is on what side of the "the economy is strong! what's the big deal?" debate is whether they have invested capital. The economy being strong only helps people who are literally invested in the economy. This is not the case for a large swath of American citizens because they have no capital to begin investing.

The pundit/technocrat/plutocrat/professorial-managerial classes of people all take it as a given that investment is even a thing. It's the fish-asks-what's-water of armchair economics. If everyone's a shareholder of something, then sure, the economy being great means everyone is benefiting. But if that money is limited to circulating among people with financial instruments working for them (in a literal sense), then obviously there's a large portion of the population who is being left out.

ksec• 7 years ago

And there was a Ted Talk on this Topic

https://www.youtube.com/watch?v=th3KE_H27bs

solidasparagus• 7 years ago

I'm so disappointed. I thought this was going to be an article about how the money pouring into the self-driving industry/AI industry matters more than whether we actually get self-driving cars.

uoaei5• 7 years ago

I was wondering when our cars would become our wallets. Guess I'll have to wait for the answer.

gwbas1c3• 7 years ago

I also thought the same, but I'm not disappointed. The article was much, much more interesting and really interested me.

wait_a_minute6• 7 years ago

Uh...isn't an index fund that tracks the S&P 500 basically self-driving money? That with something like Mint is basically all you need to do well financially speaking. It feels like this blog post is massively overcomplicating the problem of personal finance. It really isn't rocket science. If anything, the basics are simple and boring and unsophisticated.

na852• 7 years ago

Don't forget the narrative being pushed by the owner class that taking on debt in the form of real estate mortgages and car loans is a sign of maturity and adulthood.

friedman232• 7 years ago

First, real estate and car mortgages are completely different, nobody in their right mind would call a car an investment. I've never seen anyone suggest that taking out a loan to buy a car is a sign of maturity. Loans for real estate can make sense financially and real estate is one way for people to become rich fast.

bluGill5• 7 years ago

Those basics don't make the big money to investment companies. If you can be talked into trading money around often they make more money on those trades.

wait_a_minute6• 7 years ago

Index funds outperform most actively managed funds, last I checked. In most cases you'd be outperforming professional investors just by sticking with the S&P 500.

Yeah, it's possible to be the 1% of traders who can outperform the S&P 500...but very unlikely especially if you look at long periods of time.

And the post is about "self-driving money" rather than active trading. In that case, an index fund that tracks the S&P 500 is basically self-driving money.

nradov• 7 years ago

Dilbert’s One Page Personal Finance List

• Make a will.

• Pay off your credit card balance.

• Get term life insurance if you have a family to support.

• Fund your company 401K to the maximum.

• Fund your IRA to the maximum.

• Buy a house if you want to live in a house and can afford it.

• Put six months’ expenses in a money market account.

• Take whatever is left over and invest it 70 percent in a stock index fund and 30 percent in a bond fund through any discount brokerage company and never touch it until retirement

• If any of this confuses you, or you have something special going on (retirement, college planning, tax issue), hire a fee-based financial planner, not one who charges you a percentage of your portfolio.

https://www.mattcutts.com/blog/scott-adams-financial-advice/

wait_a_minute6• 7 years ago

Is that in order? I'd say having six months' expenses saved should be higher up in that list. After you've paid off all debt besides a mortgage, but before you start maxing out a 401k or IRA.

bluGill5• 7 years ago

401k need not be maximized - if it should depends on your age, existing savings and if you actually want to retire early, same for IRA.

You need to figure out how much savings is right for your long term plans. The 6 months expenses is the only one that I think applies to nearly everybody - even then if your doctor just gave you 2 weeks to live 6 months expenses isn't useful. Some people want to retire early - other people have discovered that a job gives them social benefits and they don't want to retire ever. Some people are willing to work longer in life so they can afford more toys now, others are willing to forego toys so they can enjoy the free time later. This is your personal choice.

jmsuth2• 7 years ago

I disagree, what you described is really just scratching the surface. Personal finance can become massively complicated, especially when you hit inflection points in your life like having a child, trying to buy a home, or nearing retirement. It is "boring and unsophisticated" math at the end of the day, but there are so many variables that it quickly becomes difficult to comprehend for most people.

People "don't know what they don't know" when it comes to financial health, especially surrounding things like proper insurance coverage and tax optimization. Software that can keep an eye on your finances and alert you to anything that seems off, or better yet, perform the necessary actions to keep you in good financial health, would be a huge help to these people.

wait_a_minute6• 7 years ago

Maybe. But to be honest that comes across as trying to sell some software. Ultimately, anyone can become a millionaire following some really boring advice.

1) Six months' of expenses in cash/money market. 2) Max out 401k if possible. 3) Anything left after that, buy index fund that tracks the S&P 500 and let it ride the market over the long term.

Literally all you need to do. Sure, there's room for some budgeting software or credit card alerting and things like that. But the market is not so complex to understand that you can't understand it yourself. I'd say within a weekend of study the average person can understand the basics.

svachalek• 7 years ago

The "Managing Cash" section was the most (maybe only) interesting section here for me. Most of the other "self-driving" examples are just about automated alerts and recommendations; I don't consider a car "self-driving" because it beeps at me when it's low on gas.

I agree personal finance is really not that hard at the basic level. The main issue is that our economy is driven by an advertising industry that depends on making sure most people never learn the basics.

gwbas1c3• 7 years ago

No, "an index fund that tracks the S&P 500" is more like cruise control.

Self-driving money would basically take all your income, and decide if it's best to invest in such index fund, or pay off your mortgage early.

I always pay off small, low-interest loans faster, because I get tired of juggling the money. If I had "self driving money," it would continue to "write the check" for me as long as it can find a better investment vehicle for my remaining money.

wait_a_minute6• 7 years ago

It's not possible to automate a decision like investing more vs paying off mortgage early, because that decision is entirely up to your personal preference.

Do you prefer being debt free, or do you prefer keeping some debt that is at 3.6% interest while you earn 7% in the market? The former has a lower risk associated with it whereas the latter has a higher potential for net worth increases over time. But to decide which one you want, you'd need to figure out what your priorities are. A machine can't do that for you.

At best it could show you the outcomes if you were to pursue either path, given some set of assumptions. But a machine also can't predict the future so it wouldn't know what the absolute correct answer is.

The reason the S&P 500 tracking is more like self driving is because the economy will likely be worth more in the future than it is today, and so will investments made into index funds. It's possible the economy could be worth less, but if that happens we'll have much bigger problems to deal with than individual net worth.

haecceity• 7 years ago

Self driving money is just index funds?

sdnlafkjh34rw5• 7 years ago

For those looking for financial institutions that don't gouge you here are some recommendations:

* Vanguard - They have been around since the 1970s and started the whole war on investment fees. Wealthfront tries to sell how advanced they are, but it's mostly a re-packaging of what Vanguard has been doing for decades. Customers are shareholders so you don't have misaligned incentives. They have tons of well managed low fee index funds. Vanguard works for most people * Ally Bank - they don't charge many fees, reimburse atm fees, and give competitive savings rates * Local credit unions - there are many local credit unions that have very fair policy and terms.

I find it ironic that this article hypes all these vc driven startups who are largely have the same incentives as the existing greedy banks and ignores existing institutions that have fair governance models and have been delivering fair and affordable financial products for decades.

whiddershins• 7 years ago

S/gauge/gouge

daxelrod3• 7 years ago

Wealthfront tries to sell how advanced they are, but it's mostly a re-packaging of what Vanguard has been doing for decades.

Can you elaborate on this? My understanding is that Vanguard provides a variety of passively managed funds, but does not give automated financial advice based on the specifics of clients' situations and needs. (Maybe you could consider target date funds the equivalent of this, but they're based on at most one dimension of client needs.)

Wealthfront, on the other hand, provides passively managed portfolios with financial advice based upon questions they ask their clients. The portfolios may be equivalent to Vanguard's funds, but the value-add is the financial advice. Maybe you don't value that advice, but it doesn't seem fair to characterize this as simply a repackaging.

(Note that this comparison will change once Vanguard launches its own roboadvisor, which was announced in October.)

sdnlafkjh34rw5• 7 years ago

Wealthfront, on the other hand, provides passively managed portfolios with financial advice based upon questions they ask their clients. The portfolios may be equivalent to Vanguard's funds, but the value-add is the financial advice. Maybe you don't value that advice, but it doesn't seem fair to characterize this as simply a repackaging.

So I worked at a competitor of Wealthfront and while this is how a robo-advisor is marketed, this isn't actually what Wealthfront does. There is no real personalization of the product; you merely fill out a survey and it comes up with a risk score that adjusts your asset allocation. I know how those surveys work (because I built one) and it is laughably close to a Buzzfeed survey that guesses which game of thrones character you are closest to. The survey gets a measure of risk, which is really just one of a million inputs that you need to give proper financial advice.

The truth is relevant financial advice requires inputs beyond a generic 15 question survey. You need to do a data dump of all your assets, your financial goals, and then you need a human (or robot) to do analysis to figure out the path forward. Wealthfront doesn't do that. It doesn't adjust my asset allocation in my wealthfront account because I already have existing funds in those areas in other brokerages. It doesn't tell me about the backdoor Roth IRA trick which will maximize my retirement savings. It doesn't analyze my 401k funds to tell me which funds make the most sense. It literally is a re-packaged target date fund that is customized based on one data point (client risk). For 99% of Americans it doesn't do any more than a target date fund or a mix of index funds do. Yes, I guess it works for the 1% of americans who's biggest financial issue is that their passive index funds don't exactly match their risk profile.

I'm a personal finance junkie, and in the last year I've talked to a lot of people about their financial goals and challenges and I've yet to speak to one where the main solution to their problems was a robo advisor. It's just not a real use case.

Here are real use cases I've encountered: * Figuring out how loan refinancing can reduce debt burdens long term * Figuring out how to contribute to their kids future education expenses * Figuring out the size of an emergency fund you need and where to put it (the answer is a high yield savings account) * Figuring out a reasonable living budget based on income and debt * Figuring out how to maximize tax burden through a combination of 401K, IRAs * Figure out how to get tax savings once you hit income limits on IRAs

The point I'm trying to make is this "variable mix of index ETFs based on a 15 question survey" is not as much of a gamechanger as the roboadvisor's tout. It's a very limited product that is actually quite easy to build, and doesn't really help most of Americans (but it sounds cool).

For me the sharedholder structure of a credit union and Vanguard is way more revolutionary than the current Wealthfront product.

exabrial• 7 years ago

Is this an advertisement? A lot of cool facts in here but it names one specific company as the solution

venturegrit2• 7 years ago

No. I am not an investor in Wealthfront, Digit or Tally and have no relationship with these companies.

middlechild9• 7 years ago

This is an ad for Wealthfront. They are trying to coin the term "self-driving money". Their CEO has been talking it up a bunch in podcasts and articles.

venturegrit2• 7 years ago

This is not an ad for Wealthfront. I am not an investor in Wealthfront, Digit or Tally and have no relationship with these companies.

krustyburger• 7 years ago

As South Park pointed out, some ads don’t even know they’re ads.

slg3• 7 years ago

Count me as skeptical when it comes to all these robo-advisors.

The primary issue is the principal-agent problem [1]. You need to align the incentives of the financial advisor with the incentives of the client. There are a few ways to do that. One example is the fiduciary duty mentioned in the article that makes it a legal responsibility to act in the best interests of the client. Another option is to allow the customer to share in the profits of the advisor through some type of customer ownership like you see with companies like Vanguard or with credit unions.

VC funded robo-advisors like Wealthfront have no solution to this problem. In order for them to be trusted with full control of your money, they would have to be satisfied with growing their profit simply by increased customer base and not want to increase profit per customer. Publicly owned or privately owned VC backed companies simply don't work like that. There is a constant need to continually increase profits. It is just a matter of time until someone at robo-advisors says "we can make more money if we add this fee". And since they control all your finances already and you are apparently the type of person who doesn't want to think about or look at your finances, odds are you probably won't even notice the new fee. That is a recipe for obvious abuse.

https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...

daxelrod3• 7 years ago

In order for them to be trusted with full control of your money, they would have to be satisfied with growing their profit simply by increased customer base and not want to increase profit per customer.
It is just a matter of time until someone at robo-advisors says "we can make more money if we add this fee".

There are a number of options beyond fees that keep incentives aligned between advisor and client. For example:

1. The advisor grows the client's assets by investing them well (because the advisor's revenue is a portion of assets under management).

2. The advisor encourages the client to invest more. This could either be moving more of their portfolio to the advisor, or encouraging regular deposits (which is a valid investing strategy.)

slg3• 7 years ago

Option 1 doesn't do a good job of aligning incentives because you are taking a small percentage of a small percentage. The article says Wealthfront charges 0.25%. Let's use 5% as the difference between a good and bad investment (this is an arbitrary but I believe realistic number). This means the difference between Wealthfront doing a good job and a bad job for the customer is the equivalent of them increasing their fee 0.0125%. That is a $1.25 increase per $10,000 invested. So what is the better bath to increase profits, doing a fantastic job of investing, which likely comes with increased expenses, or increase your fee some tiny percentage that will almost surely go unnoticed by the customer?

Option 2 is moot for the authors example since they suggest these companies manage everything and therefore a customer can't give the advisor more to manage.

saviorand• 7 years ago

So basically... let an algorithm make financial decisions for yourself and all problems are solved?

JohnFen• 7 years ago

spend no time in school—or anywhere else—teaching them what money is, how it works, and what the rules of the game are.

Things have sure changed from when I was in school. I remember that a significant amount of time was spent on this.

gwbas1c3• 7 years ago

Maybe we could start with some simpler services?

Context: I very rarely set up autopay because the cost of a mistake is high.

I wish I had a bank that showed my money in a cashflow view: Money coming in per day / week / month / year, cost of bills and services per day / week / month / year, and some semi-smart automation to autopay my loans, save, and invest.

What do I mean by semi-smart? For loans, know the interest rate, date due, length, ect, and calculate when it's better to invest versus pay off early.

For example, if, when adding a loan to billpay, I could add some of this additional information, it would be much easier than just adding autopay.

The future of finance is self-driving money

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