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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.

If you were looking for a year end Top 10 list, sorry to have disappointed you. On the whole, 2011 was a year that many people would like to forget especially the Indian equity markets. On the upside, many technology startups such as Dropbox, Evernote and Twitter received even more funding. I would say 99% percent of the people were unhappy with 2011 and 1% were ecstatic about 2011.

A trend that I have noticed more and more during 2011 was in the area of seed funding for a startup. I’m not an angel investor but I get about 1-2 unsolicited pitches a week. During 2011, most were structured like this:

Idea Guy – I have a great idea and I need 1 million dollars to hire the entire team to do the work

Me – What do you mean by entire team?

Idea Guy – product team, engineering team, UI/UX team and marketing team

Me – So what is your role?

Idea Guy – I have the idea

Me – Do you have anything so far to show for it

Idea Guy – Of course not, hence I need the million dollars

Me – Do you have a website?

Idea Guy – No, I couldn’t get the domain name, I couldn’t figure out which hosting company, but I have a PowerPoint slide deck…

At this point, I usually just mentally shut down and hope my cafe latte is still hot enough to enjoy while being tortured into viewing the slide deck. I could spend hours talking about how bad most of these slide decks are but honestly that is not the most concerning thing. The most concerning thing is the “Idea guy” wants a million dollars and then everything will happen, that is not how it works. You need to bring some talent to the table.

I can understand if you don’t have the technical skills to acquire a domain name, start a blog or get a basic website running but you might have friends that can.  The early days of a startup are about conserving capital and trying to persuade people whether it’s to buy your product or get things done cheaply. This “idea guy” wanted to hire PaperPlane one of the best UI/UX companies in India to design the site, sure why not it ain’t his money.

Recently there was an article about Dropbox founder Drew Houston who had to hack the Apple operating system to understand how the desktop icon images worked. This was something that even other engineering teams at Apple couldn’t figure out. I’m assuming the VC firms are backing Drew as much as Dropbox, as they know what is possible with him.

Bottom line, if you can’t figure out how to get a blog started (or know someone that can) how in the hell are you going to run a company. I can envision that million dollars being spent very quickly, which is not what people want to see when they are investing in an idea, person or company.

In 2005, my colleague and I partnered with Refco which at the time was the largest commodities brokers in the world to launch a new product in India…what could go wrong? I landed into India on October 1, 2005 and on October 10 a press release was issued that the CEO was resigning because of “accounting irregularities”. Whenever you hear “accounting irregularities” you can safely assume the worst possible outcome, a week later Refco filed chapter 11 bankrupty. Listening to the reports over the past two weeks about the impending collapse of MF Global was like déjà vu for me, this is actually their second collapse.

The latest collapse is even more sinister then the first one. At least during the Refco collapse Phil Bennett took a loan to cover his proprietary trading (aka prop trading). However, it appears MF Global took customer segregated funds to shore up their losing prop trades on bonds which is hugh no-no. The reports are still filtering in as to what exactly happened and who knew what. However, this quote from a lawyer really ticked me off “To the best knowledge of management, there is no shortfall”. A very carefully worded statement which essentially says “don’t hold the management team accountable”.

When working with Refco during the transition to Man Financial (which eventually became MF Global) it was surreal. I just landed into India with plans to stay for 6 months while we got everything up and running. And within 10 days my dreams turned to despair. I had a great vantage point as I was sitting next to Vineet Bhatnagar, MD of Refco-Sify India, as everything was collapsing around the world for Refco. We would hear reports of what was happening via the newswire or rumors from the “New York guys” but during all this craziness Vineet was calm and cool throughout the entire ordeal. He gave interview after interview saying how the India operations were “ring-fenced” and things would be back to normal. Certain parts of the business came back to normalcy faster then others, it was a trust thing. I think the institutional guys understood their money was safe but many retail clients didn’t care what was being said.

In any event, our new fund was completely crushed…100% wanted their money back NOW. All the investors got their money back and said they would re-invest once the dust had settled. Sadly, some of India’s most prolific investors who were in the first fund did not return for the second fund which we started in March 2006 under the Man Financial banner.

Right now there are two types of people that exist at MF Global-Sify India, people that witnessed the first collapse and the “new guys.” Anyone who was there during the first collapse is a little concerned but have seen this movie before. The “new guy” is probably shitting in his pants. Having worked with the Indian management team there is no doubt they are top notch and everything continues to be above the board. There was a report in DNA Money newspaper that Vineet “had put in his papers”, I almost choked on my morning coffee when I read that. Not because “oh my god he is leaving” but rather “oh my god he would NEVER leave India”. Of course, people love sensational headlines and the MF Global collapse definately provides it.

When I was growing up in Indiana I was one of the few minorities in a town of 12,000 people. I would always hear the typical stereotypes about Asians being smart in math. Some how math was never my strongest subject and during my adolescence years it was highlighted quite frequently. My math teacher, Mr. Brother’s would hand out the graded tests based on your grade (highest to lowest) and invariably I would get back my test in the bottom 25%, god I hated that fu!@&% math class so much. However, it’s probably why I gravitated towards computers and Lotus 1-2-3. Funny thing, my hatred for math started even before I got to Indiana.

When I lived in Chicago one of our closest family friends had a son that was basically a supercomputer made to look like a dosa eating South Indian. Shyam was the all-star brainy kid of Chicago and I’m sure I was not the only kid in the greater Chicagoland metro area to get compared to him. Typical comments like “Well, Shyam can spell that” or “Shyam did 1599 on his SAT, he missed a point because he was busy writing to the New England Journal of Medicine about curing cancer.” At one point I thought the Chicago suburb of Schaumburg (pronounced “shyam-berg”) was named after him because he was so damn smart.

When I moved to India in 2005, I thought I would be surrounded by human Intel dual-core processors that would put Excel to shame. Slowly though I started to realize that only a subset of Indians are good at math. The more I looked around, the more I realized Indians are generally REALLY bad at math. This assumption was not from intensive research but looking at one simple product – the credit card.

Everyone wants to live the American dream which is really just consumerism fueled by credit cards and Indians are no different. 10 years ago credit cards were nowhere to be found in India but once the young work force started to work in call centers they started getting credit cards. The theory is these kids were pushing credit cards to Mike in Montana during the night at their call center job (remember the 12.5 hour time difference) and during the day they wanted to live the “American dream” so they would charge up a storm on their own credit cards.

Everything up to this point seems legitimate until you open the first bill and see the interest rate the banks charge. I got my first Indian credit card about 3 years back and almost had a heart attack while looking at my monthly statement where it said they would charge me 3.3% per month. I have NEVER in my life paid a nickel in interest but I was shocked at the arrogance of the banks to charge such high interest rates. It’s also part marketing, they never talk about the annual rate because that would scare people off. Instead, when people see 3.3% per month they probably think its okay and harmless. However, when you do the quick math of 3.3 times 12 you come up with 39.6% per year to have the luxury of carrying a balance.

Charging 39.6% is almost criminal. Oh wait, it is criminal but only if you take money from a microfinance institution like SKS Microfinance. Legally, if you take a loan from SKS they cannot charge you more then 26% a year, granted we are talking about different needs. Microfinance is about helping people get out of poverty, whereas credit cards seem to be helping people go into poverty.

Being in India, I can finally feel smart when it comes to numbers.