celestri.org

If you noticed lately you could hear the crickets chirping on this blog. I have not been as active and it’s not for a lack of things to write about.

Honestly, I had a blog post lined up about ex-Congress spokesperson Abhishek Singhvi and his insistence that the CD that made it’s way to the internet was doctored. If that CD was doctored and it was not really him, then Pixar needs to find and hire the guy for his amazing computer-generated imagery (CGI) skills.

Anyways, the reason for the silence is because I’m in the process of writing a book. I just started the book and hence this blog might feel like being the first person at a party – empty and nothing to do. However, I will be writing from time to time on various topics but not consistently until the book is released.

What is the book about? Ahh, you’ll just have to wait and see once it gets published.

I think everyone can agree that making money is not easy, but what is even more difficult is managing it. One area within the financial services sector that is ripe for disruption is the multi-trillion dollar wealth management business. Even with all the gee-whiz technology of the internet, there has yet to emerge a company that has made a serious dent in this space. Of course, there is mint.com which aggregates all your financial data and then provides recommendations to you but doesn’t really help with the wealth management piece.

The idea of having a wealth manager, financial advisor or private banker looking after your money sounds very alluring. Typically, these managers charge you based on the assets under management (AUM) they supervise, so if they charge 1% and you have USD 1,000,000 you will be paying them USD 10,000 a year. The fees range from .5% to 2.5% and that is just the management fee, there are also the fees that the products they recommend charge. This multi-layer fee structure is what most startups want to disrupt.

One of the most respected wealth managers is Goldman Sachs Private Wealth Management. Never heard of them? There is a reason, you need a minimum of USD 100 million in liquid investments to even open an account. They don’t need to advertise because they get many of their clients from the various deals they advise on around the world – M&A, private equity, restructuring and public offerings. So, who are some of the new kids on the block challenging the old boys network of Wall Street?  Betterment, FutureAdvisor, Personal Capital and Wealthfront.

Betterment, Personal Capital and Wealthfront all charge a percentage of the AUM – Betterment (.15%), Personal Capital (~.80%) and Wealthfront (.25%). FutureAdvisor charges a fixed cost whether you have USD 10 or USD 10 million, the most expensive plan is USD 195 a year.  All these ventures want to re-create mint.com for the wealth management space by relying heavily on technology and try to minimize the amount of human interaction with an advisor.

Of all of them, I believe Personal Capital might have a shot since it still relies on a traditional advisor but it’s fee structure is essentially the same as existing wealth managers. Having a slick user interface with great graphics might work for mint.com but in the wealth management space having access to an advisor on demand is really the core of the business. Working on a clients overall asset allocation is only one piece of the pie. So, is there a better model?

The existing old school wealth managers charge a hefty percentage and provide advisors whenever a client calls and even provide access to specialists for areas such as taxation and succession planning. The clients are happy but pay a heavy price. The new age websites want to limit access to advisors and use technology to streamline the advice. However, by taking a page from the health insurance playbook and implementing a co-pay system it might bridge the gap. A quick recap of the insurance industry co-payment system:

A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such as doctor visits and prescriptions drugs at the time the service is rendered, with the insurer paying the remaining costs

A co-pay system could provide the happy balance between a wealth management firm and its clients. The management fee would be similar to the monthly/yearly insurance premium you would pay. Then if you have a specific question you would request access to an expert advisor and pay a small fee for the advice. If the advice generates additional fees for the management firm then great, if not then at least it would be able to partially cover the cost of the meeting. The co-pay system might be a radical idea but then again the industry is ripe for disruptive change.

There is a constant debate between financial services firms and government regulators over financial market regulations – over regulate them or let them run wild and free. If there are no financial regulations in place, you end up with what we have today – a highly unregulated derivatives market. The unregulated derivatives market led to the financial collapse of 2008 and the massive destruction of wealth, yet as of today there are still no guidelines in place to regulate this highly toxic market. On the other end of the spectrum is completing choking the market with financial regulations and deterring business.

In between is that fine line that needs to be in place for markets to be efficient, transparent and trustworthy. In an emerging market like India, the regulators should be first and foremost focused on protecting the consumer. Secondly, in order to attract first time consumers the regulators should be promoting a culture of openness, simplicity and easy to understand language for financial products.

However, over the past 3 months the Indian regulators seem to be going in reverse and making it more difficult for first time consumers to make decisions. They appear to be adding more financial jargon to the process and potentially scaring off first time consumers. For most consumers in India, there are 3 government regulators that have oversight over the bulk of their money:

- IRDA (Insurance Regulatory and Development Authority) – insurance sector
- RBI (Reserve Bank of India) – banking industry
- SEBI (Securities and Exchange Board of India) – oversight of the equity/debt markets

About 3 months back the IRDA essentially shot itself in the foot when it announced new guidelines for websites that aggregate insurance information. Overnight the guidelines killed the business models for insurance aggregators. Personally, if I’m shopping online for insurance I want to be able to compare the various products and understand the pros/cons of the various offerings. However, with the latest IRDA ruling it has banned these websites from providing “opinions” on products or ratings. For first time consumers a rating is such a quick way to decide which product is better. Instead you force the consumer to read through jargon filled insurance material and in the end they will probably not buy anything because its difficult to decipher.

Likewise, SEBI recently introduced new guidelines for the type of information that mutual fund companies can provide in their marketing materials across all mediums – print, TV and web. Specifically, mutual funds companies can no longer provide a rating from someone such as Morningstar, Value Research or S&P. In addition, rankings or testimonials are also off limits. Once again this is moving in the wrong direction, a star rating is easy for someone to understand like a hotel rating – 1 star vs 5 star. Of course, consumers could just goto the websites of Value Research or Morningstar and get the star ratings and rankings themselves.  But, that assumes a first time consumer would know about Value Research or Morningstar which I doubt.

The flip side is that these rankings and ratings were leading some consumers to skip researching these new products altogether. My feeling is if consumers are that stupid to part with their money that easily, then no amount of change in regulations will curb that kind of behavior.

The term innovator’s dilemma is applied when talking about how a company handles disruptive technologies that could cannibalize their existing revenue streams. Innovator’s Dilemma is also the name of a book written by Clayton Christensen where the term originally came from.

Kodak is a company that couldn’t handle the innovator’s dilemma and recently filed for Chapter 11 bankruptcy. As crazy as it sounds but Kodak actually invented the digital camera. However, it didn’t commercialize the technology because it couldn’t look past the highly lucrative camera roll and printing business. Those revenue streams would have been killed but it potentially could have made a killing with it’s latest innovation – the digital camera.

Another recent example is Cisco. Since the early 2000′s Cisco has been selling internet telephony products which were complex and required a lot of expensive equipment. In the meantime, Skype was building a consumer product that was easy to use and cheap. Ideally, Cisco should have bought Skype but it couldn’t look past its enterprise customers that were buying expensive equipment. And remember, back then Cisco was looking to be a consumer focused company by acquiring brands such as Linksys and Pure Digital, the makers of the Flip camera. Instead, Microsoft saw an opening and eventually acquired Skype. Now Cisco is challenging the Skype/Microsoft merger because it fears its own video conferencing solution may be blocked and enterprise customers would opt for a Skype/Microsoft solution.

This brings me to India, which I believe is stuck in it’s own version of innovator’s dilemma. Inefficiency, middlemen and leakage are all words for the same thing – corruption. When technology is pitched as a solution to curb corruption people come out of the woodwork and say how the proposed system is too expensive or too difficult to use or politically motivated. The reason for the bad press is because no one really wants to change the way they work.

One example is the government’s plan to move to an electronic system of government subsidies and social welfare payments using Aadhaar linked accounts. Initially it would appear that the middlemen would be completely cut out from the process, however by having money go directly to bank accounts many other industries/services might benefit from it. Services such as micro insurance, micro payments, micro financial services, etc… The dilemma is that the middlemen will have to do more work to benefit from these new opportunities and usually that is not taken very well. Hence, all the trash talking about how bad Aadhaar is for the country and people’s privacy will be at risk. This is a classic case of innovator’s dilemma – the middlemen are happy with status quo because they can’t think beyond their current revenue stream.

The above example is par for the course all over India. People don’t like technology because it speeds up everything, makes people accountable and introduces transparency. People are afraid of technology because they feel they will become irrelevant, but you become irrelevant if you ignore technology.

Whether you are a CEO, sales guy or entrepreneur the fantasy of exponential growth is what we all strive for. However to experience white hot growth is a myth. Over the past 2 weeks I’ve been seeing headlines of the white hot growth of Pinterest. (Yes, it’s heralded as the next “big thing” but I have zero use for an online scrap book. That maybe a simplification of Pinteret but that’s not the point of this post.)

Pinterest is the latest in a series of similar stories such as “XYZ is growing faster than Facebook did in its first 18 months” or “XYZ has more 1/4 the page views of Twitter”. The headlines are supposed to grab the attention of the reader and I assume make the reader want to get on the latest bandwagon social platform. The thinking is “wow I’m on Facebook and if XYZ is hotter than Facebook then I should be on XYZ.”

If you look at the early growth curve for Facebook or Twitter in retrospect it was good but not phenomenal. Twitter was slow and steady in the early years in the past 2 years the growth has really accelerated. In fact, when Facebook was launched it was not for you and me, it was targeted at the Ivy League schools.

Recently, Dennis Crowley of Foursquare summed it up best:

Everyone thinks the Foursquare experience is this rocket ship that started at SXSW 2009 and it hasn’t let up, when in reality it was a little spike and then a summer of nothing

The truth is Dennis can say this now and be open about it, back then if it said the same thing it would have surely killed the enthusiasm. Because, from a startup perspective you want everyone to believe that your company REALLY is the hottest thing since Facebook or Twitter. Which is exactly what Pinterest is doing. The question is, will they be around to be as honest as Dennis is.