
The future of finance is self-driving money - venturegrit
https://venturegrit.substack.com/p/why-self-driving-money-is-more-important
======
danans
> 78% of Americans live paycheck to paycheck, and most Americans would
> struggle to cover an unexpected $400 expense. > How did we get here? > Why
> aren’t we doing better? > Managing Money is Hard

We aren't here because millions of Americans didn't manage their savings
optimally. They went to work, played by the rules, and saved what they could.
We're here because the gains due to productivity growth for the last 40 years
have increasingly gone to the to top wealth and income percentiles. That is
the result of tax and trade policies changes that began in the 1970s and were
cemented by the 1990s.

Meanwhile, concurrent with those changes, the cost of things that used to be
"basics", like health care, higher education, and housing, have skyrocketed,
while previously "universal" rights like good public primary education have
been turned into lotteries. Society's capital has been sold to the highest
bidder, and most of us have had no choice but to be part of that auction.

None of this is to excuse banks extracting revenue from savers via fees, or
other similar practices pointed out in the article, but better management of
personal financial capital won't be effective in helping people who can't
cover an unexpected $400 expense, because those people have no financial
capital to begin with, and due to tax policies designed to keep wealth in
dynasties, their children likely won't have any capital either.

~~~
bluGill
there are doctors making $500k/year living paycheck to paycheck. There are
people working fast food who manage to save money. It is a spending problem.

The things you list do not help either group, but the fact is most people
spend every penny.

~~~
tmh79
> there are doctors making $500k/year living paycheck to paycheck

This isn't true, at least in any sense of the word we would agree with. (Wife
works in medicine, is a doctor at this level, we run in these circles). They
are "living paycheck to paycheck" in the sense that they've set their stock
brokerage to automagically deduct 10k usd/month from their bank account, and
they pay 10k/month on a mortgage (which accumulate equity) and their checking
account doesn't grow in size and their monthly float is the same. Some of them
pay for private school which means they only save 3k/month instead of
10k/month, how oppressive. Their checking account "funny money they allow
themselves to spend on anything" isn't growing and is the same, but their net
worth is growing 15k/month.

~~~
uoaei
The assertions like GP are laughable every time they come up. Having no
liquidity is not the same as living paycheck-to-paycheck. LP2P means not being
able to scrounge up any money for vital necessities until the next pay period.
Most doctors (and for that matter, most people who complain about high COL
lifestyles while working in tech) can obviously pull a bit of cash from their
investment accounts if need be. Yes there are fees attached but you can handle
those. LP2P means you're living in your car if you can't get the money in the
next 4 weeks.

------
sdnlafkjh34rw
For those looking for financial institutions that don't gouge you here are
some recommendations:

* Vanguard - They have been around since the 1970s and started the whole war on investment fees. Wealthfront tries to sell how advanced they are, but it's mostly a re-packaging of what Vanguard has been doing for decades. Customers are shareholders so you don't have misaligned incentives. They have tons of well managed low fee index funds. Vanguard works for most people * Ally Bank - they don't charge many fees, reimburse atm fees, and give competitive savings rates * Local credit unions - there are many local credit unions that have very fair policy and terms.

I find it ironic that this article hypes all these vc driven startups who are
largely have the same incentives as the existing greedy banks and ignores
existing institutions that have fair governance models and have been
delivering fair and affordable financial products for decades.

~~~
daxelrod
> Wealthfront tries to sell how advanced they are, but it's mostly a re-
> packaging of what Vanguard has been doing for decades.

Can you elaborate on this? My understanding is that Vanguard provides a
variety of passively managed funds, but does not give automated financial
advice based on the specifics of clients' situations and needs. (Maybe you
could consider target date funds the equivalent of this, but they're based on
at most one dimension of client needs.)

Wealthfront, on the other hand, provides passively managed portfolios with
financial advice based upon questions they ask their clients. The portfolios
may be equivalent to Vanguard's funds, but the value-add is the financial
advice. Maybe you don't value that advice, but it doesn't seem fair to
characterize this as simply a repackaging.

(Note that this comparison will change once Vanguard launches its own
roboadvisor, which was announced in October.)

~~~
sdnlafkjh34rw
> Wealthfront, on the other hand, provides passively managed portfolios with
> financial advice based upon questions they ask their clients. The portfolios
> may be equivalent to Vanguard's funds, but the value-add is the financial
> advice. Maybe you don't value that advice, but it doesn't seem fair to
> characterize this as simply a repackaging.

So I worked at a competitor of Wealthfront and while this is how a robo-
advisor is marketed, this isn't actually what Wealthfront does. There is no
real personalization of the product; you merely fill out a survey and it comes
up with a risk score that adjusts your asset allocation. I know how those
surveys work (because I built one) and it is laughably close to a Buzzfeed
survey that guesses which game of thrones character you are closest to. The
survey gets a measure of risk, which is really just one of a million inputs
that you need to give proper financial advice.

The truth is relevant financial advice requires inputs beyond a generic 15
question survey. You need to do a data dump of all your assets, your financial
goals, and then you need a human (or robot) to do analysis to figure out the
path forward. Wealthfront doesn't do that. It doesn't adjust my asset
allocation in my wealthfront account because I already have existing funds in
those areas in other brokerages. It doesn't tell me about the backdoor Roth
IRA trick which will maximize my retirement savings. It doesn't analyze my
401k funds to tell me which funds make the most sense. It literally is a re-
packaged target date fund that is customized based on one data point (client
risk). For 99% of Americans it doesn't do any more than a target date fund or
a mix of index funds do. Yes, I guess it works for the 1% of americans who's
biggest financial issue is that their passive index funds don't exactly match
their risk profile.

I'm a personal finance junkie, and in the last year I've talked to a lot of
people about their financial goals and challenges and I've yet to speak to one
where the main solution to their problems was a robo advisor. It's just not a
real use case.

Here are real use cases I've encountered: * Figuring out how loan refinancing
can reduce debt burdens long term * Figuring out how to contribute to their
kids future education expenses * Figuring out the size of an emergency fund
you need and where to put it (the answer is a high yield savings account) *
Figuring out a reasonable living budget based on income and debt * Figuring
out how to maximize tax burden through a combination of 401K, IRAs * Figure
out how to get tax savings once you hit income limits on IRAs

The point I'm trying to make is this "variable mix of index ETFs based on a 15
question survey" is not as much of a gamechanger as the roboadvisor's tout.
It's a very limited product that is actually quite easy to build, and doesn't
really help most of Americans (but it sounds cool).

For me the sharedholder structure of a credit union and Vanguard is way more
revolutionary than the current Wealthfront product.

~~~
daxelrod
I too have worked at a roboadvisor and to my understanding (as an engineer,
not a financial advisor), its advice was more complex and useful than how you
describe Wealthfront works. I haven't personally used Wealthfront so I'm not
as familiar with what it does specifically.

> "variable mix of index ETFs based on a 15 question survey" is not as much of
> a gamechanger as the roboadvisor's tout.

I agree that if that's all your roboadvisor is doing, it's a bad roboadvisor.
You point out a wide range of other financial advice people need. The thing
is, quite a lot of that is possible algorithmically.

> Figuring out how loan refinancing can reduce debt burdens long term

You can absolutely do this algorithmically, and Credit Karma's offering is
already moving in this direction, if it's not already there.

> Figuring out how to contribute to their kids future education expenses

If this gets into "how do I change my current spending and income to be able
to contribute to my kids' education", you're right, that's not something that
fits into the algorithmic model easily.

> Figuring out the size of an emergency fund you need

Not difficult get a reasonably good outcome here with a questionnaire.

> Figuring out a reasonable living budget based on income and debt

Agreed, this becomes similar to the education bullet point above. YNAB is a
much better example of how to solve this with a software product.

> Figuring out how to maximize tax burden through a combination of 401K, IRAs

This fits into a roboadvisor's model reasonably well, right? (Although they
likely can't make money on the 401K part without being the employer's 401K
provider.)

> Figure out how to get tax savings once you hit income limits on IRAs

Is this so different from what TurboTax does algorithmically? (Depending on
how fancy you want to get with the tax savings).

You've made a great argument about the original point you made that I
challenged, and convinced me. Where we may differ is that I see a large number
of corollary services that a roboadvisor could offer that together would be
substantially more useful than a glorified target date fund.

~~~
sdnlafkjh34rw
I think I have a different perspective because even though I'm an engineer I
worked in finance before and am a huge personal finance nerd. Some of the
engineers on my team were impressed with the "sophistication" of our product,
but I remember talking to our head of finance and thinking that's it? Even he
admitted it was just basic asset allocation strategy. When I talked to our
head of finance, he strongly believed Wealthfront (or Betterment) were doing
the same thing. We actually back tested our competitor survey's and asset
recommendations to ours and it was pretty obvious that all the roboadvisors in
the space were building almost exactly the same risk model with very similar
recommendations.

At the end of the day it's not a roboadvisor but it's a robo allocater.
Frankly asset allocation isn't a hard problem, I've been doing it manually for
years.

> Is this so different from what TurboTax does algorithmically? (Depending on
> how fancy you want to get with the tax savings). Turbotax does not do this
> at all. It just fills in your tax forms. It does not advise you on tax
> strategy. To give an example, I'm gonna assume that since you are/were a
> roboadvisor software engineer, you are most probably out of the income
> limits of a roth IRA or IRA. If so, did you ever have TurboTax suggest you
> to do a backdoor roth when filling out taxes? I've filed taxes with TurboTax
> and I've never them suggest that (not saying they couldn't). My human CPA
> did though :)

I think your other objections are that automation could do this work. I
totally agree. In my original response, I called out that this work could be
automated. So yes, I agree in theory that fintech could do this, and I wish
they would. But in my viewpoint, I actually don't see this happening.
Specifically a lot of the challenges for everyday Americans finance wise are
not profitable to serve.

The point I'm making is that a lot of fintech players like to play this
marketing game where they are helping out the "common" man against Wall Street
with super "sophisticated" products. In my view thats largely marketing, the
products are are not very sophisticated and they aren't interested in serving
the common man since they can't make easy money off of them.

------
middlechild9
This is an ad for Wealthfront. They are trying to coin the term "self-driving
money". Their CEO has been talking it up a bunch in podcasts and articles.

~~~
venturegrit
This is not an ad for Wealthfront. I am not an investor in Wealthfront, Digit
or Tally and have no relationship with these companies.

~~~
krustyburger
As South Park pointed out, some ads don’t even know they’re ads.

------
wait_a_minute
Uh...isn't an index fund that tracks the S&P 500 basically self-driving money?
That with something like Mint is basically all you need to do well financially
speaking. It feels like this blog post is massively overcomplicating the
problem of personal finance. It really isn't rocket science. If anything, the
basics are simple and boring and unsophisticated.

~~~
nradov
Dilbert’s One Page Personal Finance List

• Make a will.

• Pay off your credit card balance.

• Get term life insurance if you have a family to support.

• Fund your company 401K to the maximum.

• Fund your IRA to the maximum.

• Buy a house if you want to live in a house and can afford it.

• Put six months’ expenses in a money market account.

• Take whatever is left over and invest it 70 percent in a stock index fund
and 30 percent in a bond fund through any discount brokerage company and never
touch it until retirement

• If any of this confuses you, or you have something special going on
(retirement, college planning, tax issue), hire a fee-based financial planner,
not one who charges you a percentage of your portfolio.

[https://www.mattcutts.com/blog/scott-adams-financial-
advice/](https://www.mattcutts.com/blog/scott-adams-financial-advice/)

~~~
wait_a_minute
Is that in order? I'd say having six months' expenses saved should be higher
up in that list. After you've paid off all debt besides a mortgage, but before
you start maxing out a 401k or IRA.

~~~
organsnyder
I'd put maxing out a Roth IRA ahead of saving for emergencies. You're limited
to a certain amount you can contribute each year, and you can withdraw your
contributed principal from a Roth with no penalty—it can effectively be your
emergency fund (or part of it). Of course, long-term you definitely want a
separate emergency fund to avoid needing to raid your Roth.

~~~
wait_a_minute
Hmmmm that could work, but I worry that if people treat their Roth IRA as
their emergency budget in the event of a recession their total amount they can
withdraw will be lower than their needs.

That is why keeping an emergency fund as a separate savings account at a bank
makes me feel more comfortable. At most I'd put my emergency fund in a money
market account to at least earn something, but the point of the emergency fund
is to be liquid and available for emergencies. If there's a steep recession
and all of a sudden you need to tap into your savings for 6-12 months until
you find another job, you don't want to be doing that when your Roth goes down
and cashing out your contributions means selling more shares than you
purchased.

------
slg
Count me as skeptical when it comes to all these robo-advisors.

The primary issue is the principal-agent problem [1]. You need to align the
incentives of the financial advisor with the incentives of the client. There
are a few ways to do that. One example is the fiduciary duty mentioned in the
article that makes it a legal responsibility to act in the best interests of
the client. Another option is to allow the customer to share in the profits of
the advisor through some type of customer ownership like you see with
companies like Vanguard or with credit unions.

VC funded robo-advisors like Wealthfront have no solution to this problem. In
order for them to be trusted with full control of your money, they would have
to be satisfied with growing their profit simply by increased customer base
and not want to increase profit per customer. Publicly owned or privately
owned VC backed companies simply don't work like that. There is a constant
need to continually increase profits. It is just a matter of time until
someone at robo-advisors says "we can make more money if we add this fee". And
since they control all your finances already and you are apparently the type
of person who doesn't want to think about or look at your finances, odds are
you probably won't even notice the new fee. That is a recipe for obvious
abuse.

[https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...](https://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem)

~~~
daxelrod
> In order for them to be trusted with full control of your money, they would
> have to be satisfied with growing their profit simply by increased customer
> base and not want to increase profit per customer.

> It is just a matter of time until someone at robo-advisors says "we can make
> more money if we add this fee".

There are a number of options beyond fees that keep incentives aligned between
advisor and client. For example:

1\. The advisor grows the client's assets by investing them well (because the
advisor's revenue is a portion of assets under management).

2\. The advisor encourages the client to invest more. This could either be
moving more of their portfolio to the advisor, or encouraging regular deposits
(which is a valid investing strategy.)

~~~
slg
Option 1 doesn't do a good job of aligning incentives because you are taking a
small percentage of a small percentage. The article says Wealthfront charges
0.25%. Let's use 5% as the difference between a good and bad investment (this
is an arbitrary but I believe realistic number). This means the difference
between Wealthfront doing a good job and a bad job for the customer is the
equivalent of them increasing their fee 0.0125%. That is a $1.25 increase per
$10,000 invested. So what is the better bath to increase profits, doing a
fantastic job of investing, which likely comes with increased expenses, or
increase your fee some tiny percentage that will almost surely go unnoticed by
the customer?

Option 2 is moot for the authors example since they suggest these companies
manage everything and therefore a customer can't give the advisor more to
manage.

------
exabrial
Is this an advertisement? A lot of cool facts in here but it names one
specific company as the solution

~~~
venturegrit
No. I am not an investor in Wealthfront, Digit or Tally and have no
relationship with these companies.

------
wizzwizz4
This looks a lot like an advertisement. It's got over two screensful of "self-
driving money is", like it's trying to drum a slogan into the mind of the
reader.

------
jsinai
> Here again we have misaligned incentives. Banks optimize revenue when
> customers have as much debt as possible.

> While expensive to develop, the beauty of software is it can be infinitely
> replicated. And at scale, the marginal cost of one additional user
> approaches zero.

So if I understand the article correctly, companies like Wealthfront can make
money by signing up more users. Their technology scales so that marginal costs
become zero and they earn an income from fees, so marginal profit also scales.

But in the long term is this enough? Surely their also needs to be an
alignment along the lines of savings: if users save more and if banks can
benefit from this, then everyone would be doing it.

------
gwbas1c
Maybe we could start with some simpler services?

Context: I very rarely set up autopay because the cost of a mistake is high.

I wish I had a bank that showed my money in a cashflow view: Money coming in
per day / week / month / year, cost of bills and services per day / week /
month / year, and some semi-smart automation to autopay my loans, save, and
invest.

What do I mean by semi-smart? For loans, know the interest rate, date due,
length, ect, and calculate when it's better to invest versus pay off early.

For example, if, when adding a loan to billpay, I could add some of this
additional information, it would be much easier than just adding autopay.

------
JohnFen
> spend no time in school—or anywhere else—teaching them what money is, how it
> works, and what the rules of the game are.

Things have sure changed from when I was in school. I remember that a
significant amount of time was spent on this.

------
Unsimplified
In a 2 person economy, if person A stops cycling money back (thru trade not
debt), person B suffers. Something similar happens in a 300M person economy,
so I agree, self driving money would be a great solution.

------
saviorand
So basically... let an algorithm make financial decisions for yourself and all
problems are solved?

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haecceity
Self driving money is just index funds?

------
solidasparagus
I'm so disappointed. I thought this was going to be an article about how the
money pouring into the self-driving industry/AI industry matters more than
whether we actually get self-driving cars.

~~~
gwbas1c
I also thought the same, but I'm not disappointed. The article was much, much
more interesting and really interested me.

