When Facebook goes public, an event we expect next month, it will make a lot of young employees very rich.
Billions of dollars of stock (back of napkin: $10 billion) will be distributed to thousands of employees. Some midlevel workers will find themselves sitting on windfalls of millions of dollars. What are they going to do with that money? At least three new Internet wealth management companies will be angling for the business of these newly rich -- not to mention every Wall Street brokerage firm and money manager in existence.
Even though most of the stock going to Facebook employees won't become liquid until a few months after the actual IPO (it will be under "lockup" for a period), the race is on to sign these kids up as customers, one way or the other.
Here are the three Internet firms I'm watching to battle for these dollars, and how they're planning on getting their pieces of the Facebook pie.
The DIY wealth portal: Future Advisor
Future Advisor is the service for the do-it-yourselfer. It's designed to ingest all your financial data, apply its recommendation algorithms, and then tell you what to do with your money. For free.
CEO Bo Lu says this approach is the right one for new, young, tech-savvy millionaires. They know that the recommendations are just spit out of a computer, and they don't want to pay a percentage fee on their money for a few microseconds of CPU time. Also, they're rooted in financial reality: "They're still used to living on $1,000 a month. For them, a $10,000 fee on a million dollars is real money," Lu says.
"For the first time in their lives," he says, "these people are going to be looked at as a source of wealth to Wall Street. They're seen as prey."
Lu says that Future Advisor does not make money off of other people's money. If users want personal advice, the company charges a flat fee for it, either pay-per-incident or under subscription, but there are no percentage rakes.
Future Advisor is unique in that it generates very specific, very tailored, and very free recommendations to help a user balance his or her portfolio to meet the guidelines of Modern Portfolio Theory. It's a great place for anyone who has a complex set of financial assets to start, and for many people accustomed to living in the world of completely online money, it may be all they need.
The mama bear: Wealthfront
If you want your money managed for you, but are comfortable enough with technology to let a computer do it, Wealthfront is for you. It's an algorithm-based, automatic money manager. Give it your money and walk away. Using the same Modern Portfolio Theory concepts as Future Advisor, it will buy a selection of ETFs (exchange-traded funds) that fit your investing and risk profile, and then keep them balanced for you over time.
Andy Rachleff, CEO of Wealthfront, says that his company is the only one of the three in this group that explicitly targets customers who work in technology. He thinks these potential customers see the advantage to having their money managed even when they are not actively doing so themselves, and that they also don't see why a human has to do that job. "They ask, Why charge 1.5 percent for something that isn't that complicated?" he says.
Rachleff says that using Wealthfront is actually less expensive than executing your own investment transactions since "we get a break on commissions." Also, Wealthfront does not charge any management fees for accounts between its $5,000 buy-in minimum and $25,000, so it could be a good place for the yet-to-become rich to put their investment money to see how it works. (Wealthfront charges 0.25% above $25,000.)
Wealthfront only buys ETFs, so users looking to invest in other asset classes (individual stocks, or bonds, or other mutual funds) will have to look elsewhere.
The new traditionalist: Personal Capital
Personal Capital also does free analysis of your financial assets. In my tests, it read more account data from various institutions than Future Advisor did. And it has a special trick: It does a very good job projecting the value of company stock options and restricted stock units; Facebook employees who have received multiple share grants might want to plug their data into this system and run the what-ifs it lets you do.
Personal Capital gives you a great graphical analysis of your financial positions. It will show you your allocation breakdown so you can see where you're over- or under-invested.
But Personal Capital won't give you specific advice on how to shift your assets around. Unlike Future Advisor, it won't tell you what to sell and what to buy. Nor will it programmatically manage your money, as Wealthfront will. To get Personal Capital really working for you, you have to sign up for the Investment Advisor service, which is runs a standard money manager model: You pay a percentage fee based on the amount of money you'll giving to them to manage. The minimum buy-in: $100,000. The fees are lower than traditional money managers, but they are, traditionally, based on the amount of money being managed.
CEO Bill Harris sees his competitors as Schwab, Bank of America, Morgan Stanley, and so on. In other words, he's angling for business from people who are accustomed to the standard financial management model but want to modernize their experience a bit. He says the new tech millionaires "are not just tech-savvy, they create this stuff. They're drawn to technological ways to interact with their money. Anything else just seems absurdly primitive. But technology alone isn't sufficient. We're talking about a life's savings. We're committed to high-tech and high-touch. It's a new model."
Now, $100,000 is a lot of money to give over to a new online business, even one that does put you in touch with real investment advisors. The high buy-in also telegraphs the standard message of wealth managers: Only the rich need apply.
No matter how much money a customer gives over to Personal Capital to manage, the firm's advisors take into account all the customer's money they're not managing as well. "We thin it's not to deal with money in silios. You need a holistic approach. It's the single most important thing that makes us different from a bank or broker."
I like Personal Capital's free portfolio analysis service and have no problem recommending it. I am unable to evaluate the part of the service that requires opening a $100,000 account. Sorry about that.
Since Personal Capital is based on human advisors, it's probably a strong solution for people who need hands-on help navigating large new tax burdens and other complexities of wealth -- which, Harris will argue, is everyone that experiences a windfall from a major IPO.
Which one is just right?
All three of these service use the same philosophical underpinning: Modern Portfolio Theory. All are less expensive, in terms of fees, than a traditional money manager. They are disruptive to the old school of wealth management. And Facebook employees will soon find themselves barraged with overt and subtle pitches from these companies.,
I expect that a large number of new tech millionaires will be happy with the programmatic service of Wealthfront, even if they really could use the hands-on approach of an advisor from Personal Capital. Those who want to take a very active role in managing their money themselves could make good use of Future Advisor and its highly specific, step-by-step investment recommendations.
I'll close with a bit of moralizing: Hopefully, the time that the newly rich won't have to spend on husbanding their personal wealth, thanks to these products, will be used instead to manage other portions of those portfolios: money that's set aside to put back into the technology community by investing in startups, or that's earmarked for charities and good works. Those Facebook billions will be able to do a lot of good beyond just making employees' lives comfortable.