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Top Ten Personal Finance Start-Ups

This article was written by in Consumer. 11 comments.

The financial industry has been mostly static for centuries, with companies doing business and offering services not much different from how the companies operated for earlier generations of consumers. When there is innovation in the industry, it generally comes from smaller companies and entrepreneurs looking to fill a need that isn’t covered by larger, less flexible entities.

While today’s start-up companies are changing how customers interact with their money, most of these small business owners have the ultimate goal of selling their businesses to larger, more established companies who will then incorporate these new services if the start-up companies cannot become industry leaders without help. In the mean time, start-ups compete for funding from a growing community of investors in the industry.

Here are ten customer-facing personal finance start-up companies that could help change the way consumers interact with money. Some have already been thriving for a few years, while others are new to the industry. These are not in any particular order.

BrightScope

BrightScope401(k) plans are tough to evaluate from the plan descriptions and prospectuses offered by plan administrators to employees. Employees can’t always choose the best investment options for them due to limitations by plan administrators. Additionally, plan administrators often change available investment options and automatically transfer employees’ money from one fund to another without sufficient notification to the investors.

BrightScope lets employees evaluate their company’s 401(k) plan. If, for example, you have two job offers and you’re comparing compensation, you can take the quality of the 401(k) plan into account by researching these companies. Each company receives an overall rating as well as scores in important categories including total plan cost, company generosity, and participation rate. You can directly compare each company with its industry peers.

BrightScope

The above image shows the overall rating for MetLife. For comparison with other companies in its industry, MetLife’s score of 73 is below Morgan Stanley’s 83.8.

LendingClub and Prosper

LendingClub LogoAs technology advances, it brings manufacturers and customers closer together, often eliminating the need for companies that stand in between, adding to the cost of products and services. In some ways, the financial industry is a “middle man.” Banks take deposits in the form of savings and checking accounts, and turn that money around and lend it to individuals and businesses in need of capital. Peer-to-peer lending companies like LendingClub and Prosper take deposits out of the process; lenders can choose borrowers and lend money directly or invest in a group of loans packaged as an investment product with measured risk.

State regulations prevent peer-to-peer lending from being available to all United States citizens, and the primary concern is that customers who may not be able to take advantage of loans from a bank turn to these options where they can be charged nearly-usurious rates. For many people, however, peer-to-peer lending has provided a solution that banks have been unable to fill, whether for borrowers or investors.

Jemstep

JemstepFor your investments that are not locked in a 401(k) with limited options, like your personal IRA or your taxable investment account, the variety of mutual funds and ETFs available is staggering. And unless you work with an unbiased financial planner, it can be difficult to choose the investments that will give you the best chance of making the most of every dollar you invest.

Jemstep is like an unbiased investment adviser with an immense set of data available to help you make investing decisions. You can create a profile for yourself that reflects your attitudes about investing. Most online investment recommendation engines stop at risk and time profiles, but Jemstep goes much further. You can decide how important fees are, whether you’re looking for actively managed funds or index funds, and whether potential tax plays a role in your investing decisions.

After calibrating your profile, Jemstep can evaluate your current portfolio and offer investment suggestions that are better suited to you.

Today, Jemstep announced it completed its Series A round of financing. Start-up companies look for funding from outside sources to grow their businesses before the business generates enough revenue on its own to finance its own operations. In total, Jemstep has raised $10.5 million from early investors in order to fund product development and hire employees.

HelloWallet

HelloWalletThere’s a need for consumers to better manage their own personal finances. Over the last decade, this has been the realm of software like Quicken and Microsoft Money, but the latter has disappeared from the market and the former is increasingly seen as an outdated piece of software. In recent years, a number of companies had been developing personal finance management software for a new generation, incorporating mobile options and focusing on reporting and trending rather than reconciliation, though the depth offered could not compete with Quicken. Many of these companies have disappeared, and the apparent winner, Mint.com, was purchased by Intuit, the makers of Quicken.

HelloWallet has emerged as a new competitor for Mint.com, but while Mint.com is now free, HelloWallet charges users a fee of $8.95 per month. For the fee, you can be sure that the recommendations you receive are unbiased — companies and products do not pay HelloWallet for advertising placement within the service. The goal of HelloWallet is focused more on overall financial advice than tracking. Mint.com has moved in this direction, as well, however.

Dwolla

DwollaMerchant account service is a big business rules by large companies. Each time you swipe your credit card or debit card, a number of companies get paid in addition to the retailer from which you’re buying a product or service. Small business that need to operate on tight profit margins to compete with larger businesses suffer in these situations, because a larger proportion of their revenue is dedicated to paying these fees.

PayPal entered the marketplace and attempted to shake up the industry, offering a new way for retailers to accept credit card payments and for individuals to initiate person-to-person payments without the help of a bank. Dwolla has taken this model and, rather than relying on linked credit cards, has found away to put the focus on cash. The cash focus could be more financially responsible for a large percentage of customers.

Dwolla charges lower fees and allows users to send cash from person to person or to pay for a purchase using your phone. Customers can transfer payments using e-mail, the web, or social media applications within Facebook and Twitter. By default, the $0.25 fee is paid by the store or the recipient, though the individual initiating the payment can change this option. Transactions less than $10 are free.

SecondMarket and SharesPost

SharesPostThe buzz today is about Facebook’s imminent initial public offering (IPO) of stock. Soon, Facebook will be a public company, and investors will be able to trade shares of the company in a liquid stock exchange. For most people, this will be the first opportunity to invest in Facebook, a company that has grown significantly over the last few years. Of course, those who own part of the company already, like early and current employees, will see the biggest benefit after an IPO, assuming the company continues to grow.

You don’t have to be an employee to own and trade shares of Facebook, however. Two companies have specialized in creating a market between a small number of common or preferred shareholders — usually employees but also capital funds — with the wider audience of investors. I signed up with SharesPost (review here) last year to gain access to Facebook shares.

Occasionally, SharesPost holds an auction of shares held by investors who wish to liquidate their holding for the best price, and investors interested in buying can participate in the auction by naming the amount of shares they’d like to purchase and the price willing to pay. If there’s a match, SharesPost handles the transfer of shares. Surprisingly, the share price for Facebook’s Class B common stock has been stable over the past year, particularly given the volume of trading is significantly lower than it would be on an open market. The price has moved from $33 to $34 per share. It will be interesting to see how the stock performs on the open market.

SecondMarket is similar to SharesPost in that it creates a market for financial products that don’t have an accessible exchange for trading. With SecondMarket, you can trade public equity, fixed income and bankruptcy claims in addition to private shares.

Google Wallet and mFoundry

Google WalletWith technology changing quickly, smaller companies are able to jump on new technology. Google is not exactly a smaller company, but the company’s development operations function like a start-up. Google also has the size to buy smaller companies with innovative ideas early in their development. Google Wallet, however, was developed in-house. New technology in mobile phones makes it easier to transmit information securely in close range, and retailers are using that technology to accept payments without swiping a card. An application stores credit card information, and when a receiving device is in range and the consumer initiates the transaction, his or her device sends the information securely to the retailers.

As more mobile devices incorporate this NFC technology, contactless transactions will continue to increase. This was a hot topic in the media several months ago, and I explained why Google Wallet would not catch on as quickly as people were predicting. Today, Google Wallet is still limited to using only Citi MasterCard credit cards or Google’s own reloadable debit card.

There’s a smaller company that has seemed to penetrate this market deeper from Google. Among mobile payments, mFoundry works with banks and credit unions to develop their own applications based on the company’s technology. I’ve focused on start-up companies that face the public rather than other businesses in this article, but mFoundry does both. Mobile banking has a long road to becoming a mature and ubiquitous service, but it’s these companies that will help bring the innovative services to consumers and bigger financial institutions.

There are many other personal finance start-up companies worth mentioning, but I limited this list to ten across a broad spectrum of personal finance to keep this article interesting and not too long. If you feel I’ve missed something substantial, please feel free to share your thoughts in the discussion area below this article.

Normally, I do not allow business spokespeople to promote their companies in the comments on Consumerism Commentary, but as long as it’s relevant, I’ll allow short comments intended to note companies looking for broader exposure in the personal finance space, but I still reserve the right to edit, moderate, or delete promotional content.

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My Future Investing Strategy

This article was written by in Financial Advice and Advisers, Investing. 27 comments.

Last week I met with a Certified Financial Planner for the first time. This was a free service provided by Vanguard, so it was a good opportunity to speak to a professional about my specific situation. For many years, I’ve been relying on mostly generalized advice, whether from books, large communities like the Motley Fool discussion forums (particularly the Living Below Your Means section), financial columnists, or a community of bloggers that has grown from fewer than a dozen to more than a thousand.

My financial planner and I started by discussing my goals. This was tough for me, as I’ve changed my long-term goals several times in the last decade. I’m trying to find the right mission for my life. I’ve made personal finance my passion since the creation of Consumerism Commentary in 2003, but long before that date I was passionate about other aspects of my life. I need to look at how I want to spend the next twenty, thirty, or forty years of my life and some of the more important developments along the way, like having a family.

From a financial standpoint, my next major expenditure will most likely be a house, though that purchase relies on making other choices in my life first.

With my current level of investable net worth — my assets outside of an emergency fund and money put aside for shorter-term goals like a house — I’m willing to give up potential returns in the stock market for less risk. We decided on a mix between 60% stocks and 40% bonds. Complicating the issue is the fact that almost all of my non-cash investments are in stocks. It will be important to look at my portfolio as a whole rather than analyzing my 401(k) separately from my IRA and separately from my taxable account. This is where tools like Quicken, offering charting and reporting across a variety of accounts regardless of where they are held, come in handy.

The 60%/40% split between stock funds and bond funds is more conservative than I would generally recommend for someone my age (thirty-five), but that might be appropriate based on my lower needs for long-term returns and need for maintaining value in the intermediate term as I determine the next steps for my life.

Before discussing specific investments, I made sure the planner was aware that I prefer index mutual funds rather than ETFs, managed mutual funds, or individual investments. The planner suggested that 70% of the stock portion of my portfolio be invested in the Total Stock Market Index with the remaining 30% in the International Stock Market Index. Half of the bond portion of the portfolio should be invested in the Intermediate Tax-Exempt Bond Fund with the other half in the New Jersey Tax-Exempt Municipal Bond Fund. I’m not sure how excited I am about the prospect of investing in New Jersey, but the tax advantage could be helpful.

I brought up the issue of tax efficiency. It was my understanding that tax-efficient investments, such as the bond funds recommended, should be invested in taxable accounts, while investments that did not offer any tax advantages should be invested in retirement plans like 401(k)s and traditional IRAs, where the tax is deferred until retirement. After analyzing my tax situation, the planner concluded the opposite would be true, admitting the idea seemed counter-intuitive. In today’s environment, the tax rate for qualified dividends, the result of stock-based mutual funds, is 15%, while income from bond-based mutual funds is taxed at ordinary income rates.

However, the bond funds he suggested to are federally tax-exempt, and one is also state tax-exempt as long as I continue living in New Jersey. The adviser’s suggestion to invest in bonds in my tax-deferred retirement accounts might make more sense if those investments were not tax-exempt. I think there’s a piece of discussion missing from my notes that might have explained this situation with a more satisfying rationale. I’ll seek a second opinion about this particular aspect of my planning.

With most of my portfolio in cash, the planner suggested moving these funds to stocks and bonds slowly, over the course of eight quarters. Leaving behind any amount I’d like to have let in cash at the end of two years, I would divide the remainder by eight to determine my quarterly investment amount. This method of dollar-cost averaging could ease the pricing risk inherent in investing a lump sum.

If my goal is only to have money for retirement, my time horizon would be long. Again, I’ll need to define some of my life goals to determine time horizons for specific pools of assets. That would be a topic for a later discussion.

In summary, these are the main points of our discussion:

  • Six months to one year of living needs in cash, including an emergency fund and any other spending needs.
  • With the rest, a 60%/40% split between stock funds and bond funds.
  • Using a dollar-cost averaging investing strategy over the next eight quarters for current funds.
  • Add the bond fund portion to 401(k) investments and stock fund portion to taxable investments.

What do you think of this strategy?

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What I Learned as a Financial Planner

This article was written by in Financial Advice and Advisers. 6 comments.

The following is a guest post from Neal Frankle, a Certified Financial Planner in Los Angeles who owns the financial blog Wealth Pilgrim. Neal has been a financial planner for the past twenty-seven years and is writing this article on Consumerism Commentary to share what he has learned from his experiences with clients over these three decades.

Even if you’ve been pursuing in your career for only a couple of years, you’ve already learned a great deal about your profession and people in general. I’ve had the same experience. Twenty-seven years ago, one of the small business ideas I had was to become a financial planner. And over that period, I’ve learned quite a few lessons about Wall Street, my clients, and myself.

What I’ve learned about Wall Street

Everything you hear about Wall Street isn’t true –- but most of it is. I’ve found that the higher up you go in management, the more detached and greedy “the machine” becomes. In fact, I’m astounded by the depths to which some firms go to enrich themselves at the expense of investors. Having said that, I must say that I’m not sure this attitude is any different from other industries.

Since I spent very little time working in corporate America I don’t know this for sure, but my guess is that all large corporations encourage political jockeying and self-serving behavior. Wall Street is no different. Take the index annuity product as an example.

When these babies were first introduced, they were some of the best investments I’d ever seen. They allowed investors to participate in growth when the market was good and protected investors from declining markets. But over time, the fat cats got wise. They realized that they could play with the way those indexes were calculated and thereby keep more profit for themselves at the expense of investors. Now, index annuities are terrible investments. This is just one of many examples.

I’ve also learned that competition sometimes works, and the mutual fund industry is a great example of this. Mutual fund fees and expenses have been dropping relentlessly over time as competition increases from Exchange Traded Funds. In short, in the debate between exchange-traded funds and mutual funds, ETFs and index funds are wining hands down.

Last, I learned that the fee structure an advisor uses says a lot about the relationship clients are going to have with the advisor. This may be self-serving because I’m a fee-only advisor. Fee-only advisors are compensated if and only if they serve clients over time. That doesn’t mean they’re going to do it, and it doesn’t mean they know how to do a good job or that fee-only advisors are qualified. Anyone can become a financial planner.

Over the long-haul, advisors generally don’t stay in business if they don’t deliver. That’s not the case with salespeople earning commissions. They get paid up front, and there is a disincentive to serve clients. Not every commission-based advisor is a shyster of course. But when someone is compensated to sell rather than advise, that’s what they’re going to do.

My experience is that commissions put advisors and clients on opposite sides of the table. Generally, the reverse is true when it comes to fee-based planners. Again, this is a generalization and there are many exceptions on both sides of the equation, but for the most part, I’ve experienced this to be true.

What I’ve learned about clients

I’ve learned that people dislike losing money more than they enjoy making money. This aversion to losing money is unfortunately and paradoxically the very reason why many investors get wiped out. If someone has no ability to absorb investment losses, they’ll do one of two things. One potential response is to stick all the money in the bank for protection. Over time, this is a losing proposition.

The other response is to invest emotionally. When the market feels good, this investor becomes aggressive. When the market feels scary, this person goes into cash. This is a perfect recipe for disaster, of course. It’s called buying high and selling low, the opposite of how someone succeeds with investing.

I don’t believe in the buy and hold strategy. There are other strategies that are more market-sensitive, and these can help investors mitigate losses and take advantage of good opportunities. That’s how I manage money, but the method I believe in is far from perfect. It is a system and not an emotional reaction. This, like any other investment methodology, has its flaws.

Some people will tell you me that they want to be aggressive investors. That may be true — until the market turns against them. Just as I need constant education in areas I know little about, some people really need to be reminded frequently about the trade-off between risk and reward. Client understanding and education is not a one-time event.

Few clients have a financial plan and even those who do rarely execute it. They aren’t clear on their objectives and they don’t know how much they’ll need to reach their goals. (Do you know how much money you need to retire?) This is a real shame. I’ve seen people with very low salaries living their dream life because they formulated a plan and executed it, and I know multi-millionaires who are absolutely miserable and live in fear. That’s because they don’t understand the basics of financial planning and refuse to learn it.

What I’ve learned about myself

I’ve learned a great deal about myself over the last quarter century as a financial planner. The most important lesson I’ve learned is that I can’t do better than my best. I used to be harder on myself than any of my clients were. In fact, during the 2008 market melt-down, clients called because they were worried about me, not their money. While my clients’ investments happened to be performing better than the market that year, we still lost money. I didn’t like that and I felt as though I had let my clients down. I was mistaken to feel this way, but I felt that way nonetheless.

I’ve learned that if I did my best, that was good enough. If it wasn’t good enough for a client, that was the client’s problem, not mine. I’ve learned that most people are good, honest and responsible. Let me tell you, when you deal with a person’s money you really get to know them. As the years pass, I’m more and more impressed by the inherent good I see in others.

I have no plans to retire. I enjoy what I do too much. I believe that the future has a great deal of opportunities ahead, and its share of challenges, as well. The most important thing I’ve learned is that I have no idea what’s coming down the pike. That’s what makes being a financial planner so fascinating.

What have you learned about yourself, others and your profession over the last several years? Were you surprised?

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Betterment Review

This article was written by in Investing. 7 comments.

Betterment is a different type of brokerage. Unlike most discount brokerages whose purpose is to get customers to trade — as frequently as possible — Betterment is looking to be your asset manager. Currently, the brokerage is offering a bonus of $25 for new customers, but the way they do business is a bit different than most brokerages you may be familiar with. This uniqueness is evident as early as the account sign-up process.

When one applies for an account with a typical discount brokerage, the applications ask about income and net worth as well as investment experience. Betterment asked about the goals and purposes of my investments. Each new account holder is encouraged to designate a main account goal, such as retirement, a major purchase, or a vacation, as well as how many years he expects to take to reach that target or the age at which he’d like to achieve a goal.

The core philosophy for investing with Betterment is the asset allocation. This is the type of simplicity that I’ve seen with 401(k) accounts. These retirement investments often try to take an important concept of investing, asset allocation, and make it simple so that busy employees can simply submit a risk profile and the investment will use this information to determine the ideal mix of stocks and bonds. Betterment takes this concept further, making the process incredibly simple.

Betterment LogoThe fees can be lower than other forms of investing. Although you could have a free account with a discount brokerage and never pay a transaction fee, you may still be subject to fees built into the investments, like expense ratios or front-end load fees. Betterment’s approach is to charge a percentage of your account’s value — or assets under management — as is the more common custom among professional asset managers who generally work with high net worth clients.

This fee depends on how much you invest with Betterment. For small accounts, the fee is 0.9%, and this fee gradually decreases as the value of the account approaches $500,000. With funds invested with Betterment at this level, the fee is 0.3%. These fees are higher, and in some cases significantly higher, than investing in low-cost index mutual funds with Vanguard, for example. With Vanguard investing, you’re mostly on your own. You alone decide your asset allocation, and many investors do not consider asset allocation at all. Betterment is more expensive, but they are also providing a service that, depending on your needs and interests, may be worth the extra cost. At the same time, it’s less expensive than having a dedicated asset managers while offering many of the same features.

BettermentYou’d have to be a hands-off individual to like the type of service offered by Betterment. You don’t choose your own investments like you would with a typical full-service or discount brokerage. Betterment chooses the investments for you, and their selections are based on a mix of index exchange-traded funds (ETFs). Betterment reinforces the idea that individual investors should not try to beat the market. For the most part, investors fail when they try, and their investments would have fared better had they remained diversified across a broad selection of investments and refrained from changing their risk profile.

In terms of financial security and legitimacy, despite being a new player in the world of finance within an industry where the major companies have been around a century or more, your assets are protected at Betterment just like they are at any major investment firm. Betterment is a Registered Investment Advisor with the Securities and Exchange Commission and is regulated by FINRA and the SEC. Accounts are insured by SIPC up to $500,000 per owner. This doesn’t protect investors from having their investments lose value, but it does protect the value if the brokerage were to fail. If Betterment were to go bankrupt or to go into receivorship, the insurance coverage would allow you to access your account.

Betterment‘s investments include baskets, and each basket represents exposure to a type of assets. To help an investment portfolio match a risk profile, the portfolio could include a combination including a stock market basket and a treasury bond basket. The treasury bond basket is split evenly between two investments, TIP: iShares Barclays TIPS Bond Fund and SHY: iShares Barclays 1-3 Year Treasury Bond Fund. The stock market basket includes these investments as of September 2011:

  • 25% VTI: Vanguard Total Stock Market
  • 25% IVE: iShares S&P 500 Value Index
  • 25% VEA: Vanguard Europe Pacific
  • 10% VWO: Vanguard Emerging Markets
  • 8% IWS: iShares Russell Midcap Value Index
  • 7% IWN: iShares Russell 2000 Value Index

Betterment will rearrange the balance between the different stock index ETFs as it sees fit, but investors control the relationship between stocks and treasury bonds through the risk profile.

Opening my account

Opening my account at Betterment was easy, and I was approved right away. Like any new financial account accepting electronic deposits from other banks, I needed to confirm my ownership of the linked account through the familiar process of verifying test deposits. I’m waiting for my external checking account to receive the test deposits so I can begin investing with Betterment.

For the micro-manager, Betterment might not be the perfect way to invest. It’s also not the appropriate service for someone who wants to trade their investments frequently or delve into investing in individual companies. Betterment’s services may be right for investors with the opportunity to save for their future outside of retirement accounts who want the simplicity of diversified investments, risk-based asset allocation, and a buy-and-hold-and-rebalance investing philosophy.

A few years, I met the CEO of Betterment, Jon Stein, at an event in New York City. At the time, Betterment was still in its planning stages. I’m glad to see the service has fully matured into something innovative and different than any other brokerage.

$25 bonus opportunity

Betterment is offering Consumerism Commentary readers a $25 bonus for opening a new account. To receive the bonus, new customers must deposit at least $250 within 60 days of opening the account and not withdraw the deposit for 60 days. For more information, visit Betterment’s welcome page for new customers.

Betterment

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How to Hedge Against Gasoline Price Increases

by Flexo
Gas Pump Fuel | crowt59

When gasoline prices at the pump increased to the point where the cost was a major news item engendering backlash among the public, oil companies were sporting big profits. Consumers reacted by buying more fuel-efficient cars and traveling less, but there is another approach for investors — an approach that mimics what commodities and hedge ... Continue reading this article…

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High-Yield Investing In a Low-Yield Environment

by Investor Junkie
Tokyo Stock Exchange Investing

This is a guest article by Investor Junkie, focusing on alternative investments. This is a broad topic, so this article functions as a brief overview. There are many ideas within that deserve deeper explanation, something I’ll consider for future articles here. Market turmoil is all around us. Last week, the 10-year US Treasury bond went ... Continue reading this article…

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How to Buy Precious Metals Including Gold and Silver

by Flexo
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There are two main reasons to head towards precious metals as a major investment. One reason one might significantly invest in metals is the belief that the value of gold and silver will increase more than other types of investments like stocks and bonds, or that the investment in metals will provide a certain type ... Continue reading this article…

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TradeKing Review

by Flexo

Launched towards the end of 2005, TradeKing is a relatively young discount brokerage when compared to many of their competitors. TradeKing, more than any other brokerage, is more in tune with today’s social networking and social media trend. This online trading network is somewhat of a forum just for investors, where they can connect with ... Continue reading this article…

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