Can The Power of the Crowd Disrupt Financial Advice?
The uncanny accuracy of crowdsourcing has been well-documented by both government and private research. The ability of average people to predict the likelihood of future events when their insights are aggregated together outstrips the results of even the best professional analysts.
Two startups want to harness the power of the crowd to disrupt investing and possibly the entire wealth management industry.
The first was Openfolio, which wants to bring the power of social networks to self-directed investing. They do this by allowing investors to share their portfolios with Openfolio’s audience and get advice from the crowd on how to improve their performance. They imagine themselves as the TripAdvisor or Spotify of investing.
The second startup was Vetr.com and their take on crowdsourcing was more granular. They aggregate predictions on where the price of individual stocks will be at some point in the future, usually three to six months. They see themselves as the Yelp! of investing.
The CEO’s of both these companies participated in a panel at the Invest2015 conference, which took place in Manhattan last month. The panel moderator was April Rudin, Founder and President, The Rudin Group.
Rudin put an interesting spin on this session by rephrasing her questions for the panelists as the ‘Commandments of Wealth Management’. I thought this lightened the atmosphere and helped to make session stand out from every other panel discussion I have sat through at conferences. Kudos!
Thou Shalt Not Share Your Investment Portfolio
The conventional wisdom has always been that investors should keep the contents of their portfolio secret. Almost as if they were pseudo hedge fund managers. At best, they would tell their friends about their winners and never speak about their losers.
Hart Lambur, Founder and co-CEO of Openfolio believes wholeheartedly in complete transparency in investing. Openfolio users link their actual brokerage accounts and share their positions, transactions and performance with the crowd. There is some privacy since the actual dollar amounts are kept hidden.
When Lambur quit his job at Goldman Sachs two years ago to start Openfolio, his bosses said he was crazy. But the account link rates of Openfolio users are much higher than expected, which shows that people are happy to share parts of their portfolio if they think they will get something in return, he insisted.
The other CEO on the panel, Patrick Williams from Vetr.com, also believes in open investing, except his firm is focused on individual equities rather than entire portfolios. Vetr (pronounced ‘vetter’) provides a platform for wannabee Warren Buffet’s to share their predictions on future stock prices.
Vetr aggregates the individual predictions in ‘Crowd Ratings’ and ‘Crowd Target Prices’ for each security. They do not yet have enough active users that are providing ratings to be able to judge the accuracy of their crowd predictions. But Williams reported that their user base is growing very fast as people try the site and then tell their friends about it.
According to Williams, the demographics of casual visitors to vetr.com trend older, towards Baby Boomers. They use the site to look at stocks and check out the crowdsourced ratings. Registered, active users trend younger, more towards Millennials, who seem happy to post their opinions on stocks, often based on their own experiences with a company, he noted. (See In|Vest 2015 Conference: Fast Twitter Recap – Day 1)
Thou Shalt Listen to Your Financial Advisor Without Question
This is one of old tenants of wealth management, Rudin stated. In the pre-Internet days, investors had to call their stockbrokers just to get a quote. The directions your investment advisor provided were followed, since they were the experts.
The wealth of information available online, including crowdsourcing sites like Vetr and Openfolio, provide seemingly endless options for investors to gather a wide breadth of opinions and go entirely self-directed.
“I find it difficult to understand why most people need a financial advisor,” Openfolio’s Lambur stated. Advisors should go the way of the travel agent, where everyone handles most of their own investing. Only very wealthy people or those with special situations should ever need an advisor, he believes.
Between crowdsourced advice offered for free and various flavors of robo-advice available relatively cheaply, Lambur may predicting the future. With the number of U.S. financial advisors falling for the fifth straight year in 2014, down to 285,000, according to Cerulli Associates, maybe they are getting the message as well?
There is a difference between trusting your advisor and doing everything they say, Williams pointed out. He made the comparison between looking up your symptoms on WebMD versus going to an actual doctor. If you thought you might have a serious illness, would you trust your health to a website?
While Williams admitted that the crowd is not always right, this past March, Vetr’s aggregated projection for the price of a barrel of crude oil was within $2 of the actual price, he announced.
In 2014, the S&P500 gained 13.6%, while 24% of Openfolio users lost money, Lambur reported. This was due to behaviors such as being single-stock focused, trading too frequently, or building ‘barbell portfolios’ with high cash allocations. His site offers advice on how users can fix their portfolios and improve their investment behavior. (See Too Digital to Fail: InVest 2015 Conference Day 2 Twitter Recap)
Can Crowdsourced Results be Trusted?
Social media has given us a platform to post information about our lives so our community can comment on it, Rudin pointed out. But can the wisdom of the crowd be trusted? It is one thing to click on a funny cat video shared by your friend. It is quite another to risk actual dollars on investments recommended by complete strangers.
There has been extensive research done on the nature, benefits and risks of crowdsourcing. A paper published by Microsoft Research found that “the benefits of crowdsourcing come with risks due to the engagement of a self-forming group of individuals—the crowd, motivated by different incentives … this increases the need for a careful design of crowdsourcing tasks that attracts the right crowd for the given task and promotes quality work.”
How have these two startups addressed these risks?
Both Vetr and Openfolio allow users to be anonymous and have their personal information obfuscated. Unfortunately, this creates the risk of bad actors using these platforms for illegal investment schemes like pump-and-dump and penny stock fraud.
Vetr built controls into their system to block people from creating dummy accounts in order to promote micro-cap stocks. They also rate the raters, which makes it easier to identify scammers who do not provide any value to the site, Williams stressed.
The requirement to connect an actual brokerage account to the site means that Openfolio cannot be used to promote pump-and-dump schemes, Lambur insisted.
Can Crowdsourcing Startups Make Money?
Similar to many start-ups, vetr.com is in a user growth mode and is not focusing on revenue, Williams explained. Their investors have asked them to avoid revenue so that they have the flexibility to pivot to new opportunities to gain the most users. They plan to start generating revenue in early to mid 2016, he stated.
Williams described four potential revenue streams that Vetr is exploring:
- Data – taking subsections of crowd predictions and analyzing what stocks they are watching; this would be interesting to the underlying companies as well investment firms;
- Freemium – charge users for access to more detailed information;
- Click to Buy Stocks – allow users to buy shares of the stocks they are watching; the trading revenue would be shared with sponsoring broker-dealers;
- Advertising – Williams smiled and said this would just be icing on the revenue cake.
Openfolio will be competing against sites like Motif Investing, where crowdsourced portfolios are also available. One big difference is that Motif is a registered investment advisor (RIA) and requires users to open a live investment account with them when they sign up. This makes it easier to try out Openfolio, since there are way fewer steps from the point where you get to the site until you can browse portfolios from the crowd.
Openfolio does not create their own portfolios, leaving that entirely up to their user base. Motif does create their own and calls them Professional Motifs. These include common sector plays such as biotech (up 51%), airlines (up 17%) and insurance (up 22%) as well as unusual ones like Democratic Donors (up 15%, includes Comcast, Google) and Repeal Obamacare (up 24%, includes Lab Corp. of America, Quest Diagnostics). They seem to have motifs for every type of investor and interest group.
Openfolio relies on automated demographic breakdowns to create slices of investors you can ‘watch’. These are based on performance (Top 25% of investors), age (50-64+) or gender (average female investor).
Motif has a much slicker interface and provides a more engaging user experience, in my opinion. With over 9,000 community created portfolios, Motif has a much larger selection and can leverage the long tail of niche investors. Openfolio has some catching up to do.
The Power of the Crowd
While the benefits of crowdsourcing have been well-defined, there are no guarantees that it is a business model that can generate sufficient ROI to keep the venture capitalists happy. There needs to be much more to gain critical mass such as cutting edge technology and an engaging user interface.
Social is no longer a ‘bolt-on’ feature, it must be holistically integrated into the process for crowdsourcing to be successful. Both these startups are trying to leverage their user’s social networks to go viral and attract a larger following.
The emerging generation of investors is much more open to sharing and taking advantage of crowdsourced advice. They find it easier to click the Yelp! app on their smartphones than to text a friend when they want to find a great sushi place nearby (so do I). The power of the crowd can be successfully harnessed to gather information about the financial markets. Whether it can generate sufficient revenue to keep these firms in business or even to disrupt the investment advisory industry is another story.