The Creative Destruction of Wall Street

I was taking a look at the different robo-advisors today and I’m just amazed at how fast technology is revolutionizing the investment industry. It’s a f***ing awesome thing to witness. I’m not specifically recommending any one of these companies but WealthFront now charges just 0.25% per year to do what most advisers charge at least 4 times as much for. Betterment charges just 0.15%. And WiseBanyan is FREE – yes, FREE. The robo-advisor price war is officially getting bloody.

It’s still very early in the game but what we are witnessing is nothing less than the creative destruction of Wall Street via Silicon Valley and it’s about time. WealthFront is the largest and fastest growing of the group and has nearly cracked $1 billion under management mainly because it’s become so popular with the tech community. As it expands outside of those early adopters into the general population it’s growth will only accelerate. The big Wall Street firms, Merrill Lynch, Morgan Stanley, etc. along with most independent investment advisers must be s****ing themselves watching this unfold. I don’t think there’s ever been a threat of this magnitude to their businesses.

I finally got around to watching The Wolf of Wall Street last night and, as a Wall Street insider, I have to say it really resonated with my personal experience (what I witnessed, not what I did, LOL). I spent just under a year at Bear Stearns before I migrated to the hedge fund world but I can tell you that that early scene movie, when Jordan Belfort first lands on Wall Street, absolutely nails it. The Matthew McConaughey character is spot on: “Fuck the clients…. The name of the game: move the money from your client’s pocket into your pocket.”

Robo-advisors now have the power to change the game entirely. Jack Bogle has been fighting this battle for decades and has surely made massive inroads in the world of investment products. In just the past ten years we’ve seen the explosion of ETFs that give investors access to every kind of index and sector at the lowest possible price. The price war between Vanguard and Schwab has now pushed the annual cost of owning the entire US stock market to just 0.04%. That’s insanely cheap!

Still, the gatekeepers, the brokers and advisers of the world, were the one thing separating the general public from these fantastic, low-cost products. They don’t make any money selling them so their clients just haven’t heard about them. It’s taken Silicon Valley stepping in to shake up the services side of the business so that Joe Retail investor can actually access these super-low-cost products. And it’s so cool to see it finally happening. Granted, there are some serious drawbacks (read this and this) but for 90% of investors robo-advisors are simply heaven sent. Do yourself a favor and look into them.