Wall Street, through its bullhorn (CNBC) has anointed the “Disrupters” to Wall Street.  Remember CNBC is pure entertainment and books the guests that will simply sell their show, it is just that simple.  The CNBC Disruptors are in turn all Wall Street “broker- dealers”, making money off of trading, unfortunately in venues, with inherent conflicts of interest, that are destabilizing the markets for all of us.  We hardly call that disruptive.

We like the concept of one of the “CNBC disruptors”, lowering financial intermediary costs.  Wealthfront is Number 20 on CNBC’s list.  Yet, we don’t want the average retirement investor to fall prey to the new Wall Street/CNBC hype that these firms are bona fide “disruptors”, if they are actually providing lower returns and contributing to market instabilities.  We have concerns with the actual performance and all in results from these new online firms are providing for retirement investors. Here is Wealthfront’s CEO Adam Nash’s comment (in red below) to CNBC,on being selected a “Disruptor”:

Wealthfront Comment to CNBC

Concern Number One – Wealthfront (Betterment and Motif – also on CNBC’s new list) Questionable Broker-Dealer Practices

The Senate Securities, Banking and Insurance Committee held a hearing today, “High Frequency Trading’s Impact on the Economy” and the Senate Committee on Permanent Investigations held a hearing yesterday, “Conflicts of Interest, Investor Loss of Confidence and High Speed Trading.”

Andrew (Andy) M. Brooks, Vice President and Head of U.S. Equity Trading of T. Rowe Price Associates, Inc. spoke elegantly in defense of a regulated market structure to protect the average retirement investor.  In his written testimony he stated:

‘We are supportive of genuine market making; however, we acknowledge that there are predatory strategies in the marketplace that have been enabled by our overly complex and fragmented trading markets. Those parties utilizing such strategies are exploiting market structure issues to their benefit and to the overall market’s and individual investor’s detriment.

Market participants utilizing such strategies are essentially making a riskless bet on the market, like a gambler who places a bet on a race that’s already been run and for which he knows the outcome.”

Wealthfront Takes Payments for Trade Routing and Takes No Responsibility for Obtaining Best Prices -Is this Inappropriate?

Wealthfront’s broker-dealer deals with “market participants” described by Mr. Brooks above. Why? Wealthfront is involved with one’s retirement dollars in the payment of fees for “order” flow, where one might get a lesser price than available at the time.   Payments to broker-dealers, such as to Weathfront’s brokerage, was a topic of concern at both Senate hearings this week.  As Wealthfront’s Customer Agreement states:

(1) “Wealthfront shall not have any responsibility for obtaining for the Account the best prices or any particular commission rates. Client recognizes that Client may not obtain rates as low as it might otherwise obtain if Wealthfront had discretion to select broker‐dealers other than Broker.”

Wealthfront, Betterment and Motif all use a relatively new broker, clearing firm, custodian – Apex, that receives payment for order flows and deals in dark pools, where there is no price transparency.  Wealthfront’s customer agreement states it also accepts payments for trade execution:

“Apex or Wealthfront may receive compensation or other consideration for the placing of orders with market centers…”

As the testimony at the two Senate hearings revealed,  these new automated trading systems and high frequency trading firms are creating conflicts of interest, higher costs, market instability, potentially such as the May 6, 2010 Flash Crash..  Quite possibly, volume for their trades is being funneled to them by Wealthfront, Betterment and Motif. You have agreed to this order flow in your Customer Agreements and it in no way benefits the retirement investor.  It strictly benefits Wall Street.

Increased regulatory costs to monitoring their destabilizing “conflicted” behavior may be costing the U.S. retirement investor in higher trading costs and most definitely wasted tax revenues to fund the regulation and studies to determine how to stabilize our capital markets.  This money could be better spent on sustainable economic development, to benefit society overall.

What is a retirement investor to do to bring about change, better returns, less risk and lower taxes?

  • Remove your money today from any “money manager” that has or utilizes a broker-dealer that is receiving money for routing retirement dollars for payment and/or to dark pools, where there is no price transparency.
  • Obtain your one and two year trailing annual returns from Betterment and Wealthfront  for your retirement account. Are there better options?  Are these online “advisors” adding value after all costs? Are they really “disruptors” or actually new “parasites” generating profits through a lower fee on passive investments combined profits from direct payments for trade executions, hiding your actual performance after all costs, resulting in guaranteed returns below the relevant index?

The selection of this years Nobel prize winners’ beliefs reflect the Committee’s respect for both active and passive strategists, Shiller and Fama.. Are you leaving too much on the table by simply letting computer algos decide what passive strategy may work for your retirement nest egg?  How do you know this computer algo is any good? Despite these firms statements these are “new” computer strategies, they have been used for over 30 years in managing retirement dollars for small accounts.

Remember these firms have no published performance history with the SEC.  They have changed their “strategy” and investment objectives frequently.  They have flipped flopped from being a “non-discretionary” to “discretionary” investment manager overnight.

These are significant red flags.

After all fees, analysis shows the new “disruptors” are not only fueling dark pools and excessive trading with “maker-taker” that is costing the stability of our markets as several experts testified this week to Congress, but also delivering passive returns, below the index, after their fees and the relevant ETF fees.  There are many market “experts” that still support active investing.  It may be best to hedge your bets, as this years Nobel Prize committee did.

So are the new “disruptors” contributing to lower returns and greater market instability for the retirement investor?