Tag Archives: stock market

Future of online trading: App stores for investing

It’s been a truism that the secret to runaway success in technology has PlatformLeadershipBookalways been in platform building.

I learned about the intricacies of building platform leadership from a book by the same name, “Platform Leadership” which I read during my MBA. The book by Gawer and Cusumano detailed how Cisco, Intel and Microsoft drove industry innovation by building a robust, standardized technology platform other leading-edge products could plug into.

The premise of the book was powerful: companies that could create products/services that served the center of a powerful ecosystem of ancillary items built on top of these products become extremely valuable.  Think Intel Inside and Microsoft’s dominance of the OS.  Presently, think of what Salesforce.com is doing with its platform as well as Apple’s iPhone App Store.  By creating a platform around which 3rd party developers are incentivized to design and build products, these companies have created something much more valuable and harder to displace than a mere product.  They’ve created a platform.

Investment field riddled with platforms

The investment field is riddled with platforms, too.  Bloomberg runs an empire based on an install-base of thousands of terminals in most of the leading investment institutions around the world.  You want to reach institutional investors with financial content? Gotta work through Bloomberg.  Yahoo Finance is the granddaddy of financial websites, far and away seeing more pageviews than any of its competitors.  You want to reach the retail investor, gotta get on Yahoo Finance.

Platforms provide necessary structure to certain markets.  In the investment field, platforms like Bloomberg and Yahoo Finance serve to

  • Aggregate content: investors don’t have to hunt down information by doing hundreds of Boolean searches on the Internet.  By serving as content aggregators, the platforms serve as a clearing house and central node to consumer info.
  • Establish an orderly market: Platforms create order by creating certain standards for their products and partners.  Bloomberg and Yahoo Finance established syndication guidelines via which partners must comply to be on the platform.
  • Create viable business models: It’s not clear to me that many investment research products could survive on a standalone basis.  Investors don’t like to pay for content and by aggregating pageviews on a single site, Yahoo Finance actually creates a viable business model for their partners and shares it out with them.
  • Consolidates usage to make single a jumpoff point to reach users: By consolidating the market, making it orderly and putting viable financial metrics behind it, finance platforms are the gateway to the users.  It’s too hard, complicated and expensive to reach investors directly.  These platforms act as market makers for the investment content bringing suppliers and customers together.

Online Brokerages as Investment Platform

While reviewing a recent product/service that E*Trade launched last week, I stumbled upon the realization that online brokerages are doing the exact same thing that Apple is doing around the iPhone.

In fact, it’s a HUGE misnomer to call these firms “online brokers”.  What were once merely online trading systems, companies like Ameritrade and E*Trade are actually now in the platform business.  As this evolution develops away from just trading toward the development of a true investment platform, these firms are creating something so much larger than just online trading or banking services.  I like the term “investment platform”.

Ameritrade’s Premier Partners


Check out what Ameritrade is doing with its partner platform.  This page lists a handful of 3rd party applications that run on top of Ameritrade for clients to receive trading alerts, Jim Cramer’s wisdom, ongoing advice about when to sell and some nifty charting.

None of these services are completely groundbreaking in and of themselves, but Ameritrade is establishing itself as the nucleus of the investment ecosystem.  By allowing developers to build tools and hook them up to Ameritrade’s API, the firm is concretizing its position as the investment platform of choice.

You want to reach investors?  Gotta get on the platform.

While the platform provider has an unbelievable amount of power, on the other hand, having a platform enables software/services developers to effectively reach the investor smack dab in the middle of the investment process — something heretofore impossible to do.  Look to see a lot of services develop around this ecosystem.

It’s like milk — for everyone

It’s a boon for Ameritrade — they can provide more services for their client base without developing them in-house.  It’s a boon for consumers because they no longer have to wait on their broker to provide new services.  It’s a boon for software developers because a move toward a platform puts them in business.

Maybe this was self-evident.  Maybe others understood that this evolution was unfolding right in front of us. In fact, both Ameritrade and E*Trade have allowed 3rd party financial advisors access to their platform, technology, services and clients for years.  Yet, I think this is a huge breakthrough in the understanding of what the future holds for these particular firms, their clients and technology development. It’s the financial industry’s equivalent of a mash-up.


Additional Resources


WSJ is wrong about the future of investment research

Very interesting article yesterday at the Wall Street Journal.  Entitled, “Stock-Research Reform to Die“, the article describes what’s happened in the wake of Eliot Spitzer’s landmark settlement against Wall Street brokers in 2003.

StockResearchUnderusedByRetailBrokerageAccording to the WSJ, this settlement was part of a wider Wall Street wrist-slap against ingrained culture that issued “overly optimistic stock research in order to win investment banking business.”

One of the results of the settlement required major brokerage houses to spend $460+ million on independent stock research for their clients.

The WSJ’s conclusion: six years later and almost no clients are using independent research.

At Credit Suisse, which has mostly institutional clients, the number of times retail clients accessed independent research from the firm’s Web site ranged from 16 during the third year of the settlement to 110 the first year.

At the old Salomon Smith Barney — now part of Morgan Stanley’s Morgan Stanley Smith Barney — its roughly 4 million retail households accessed about 12,000 reports each month. Less than 2% of Goldman Sachs Group Inc.’s Private Wealth Management clients likely downloaded a report each month, according to data from the public reports.

The WSJ mentions 3 reasons why investors haven’t taken up independent research at their broker:

  1. investors rely upon their brokers to act as a screen:  While 11% of brokers consumed independent research at least occasionally, they typically don’t send independent research out to clients.
  2. investors don’t rely as heavily on stock research today as they used to: “In the late 1990s, a positive report from a hot analyst could send a stock soaring. That effect is more muted today.”
  3. structural changes away from brokers to advisors: Commission-based business is old-school.  It’s been replaced by fee-based professionals acting as advisors.  There is less emphasis on trading at the retail level and less need for this type of research.  Combined with chinese walls going up between brokerage and investment banking, banks are cutting back on research teams as research becomes harder to monetize without the tie-in with banking.

Just wanted to chime in with a couple of comments:

  • I agree that full-service brokerage clients rely upon their brokers to act as screens.  That’s why they pay them and why they work with an advisor.  The vast majority of clients do not know how to read research or want to be bothered.  They want a quick synopsis why they should own a particular stock and for that, the broker acts as a type of well-heeled Cliffs Notes.
  • Maybe investors weren’t even aware that independent research was an option?  Do they know why it’s important?  Are investors aware of the biases which still exist in sell-side research?
  • Why depend on the guilt party to distribute the cure to the sickness?  That’s nuts.
  • Totally disagree with the fact that investors don’t rely on research. I would say that it’s more accurate to say that given historical conflicts of interests, investors no longer trust institutional research.  Given the gaping void left by Wall Street and the rise of financial bloggers and aggregation sites like SeekingAlpha,  many investors are actually consuming more research on more companies than ever.  We’re in a Renaissance/Gold Run/Bull Market for investment content — it’s institutional research that’s not finding its footing.
  • It’s hard for brokers today. Without an edge in research or asymmetrical information, it’s hard to push stocks and get paid for it.  That’s why many brokers have become mere wolves-in-sheeps-clothing: they’re still brokers but get paid as advisors.  We’re also seeing the emergence of true financial fiduciaries who work extremely hard for their fees and performance for clients, in up and down markets.   These advisors are doing real research or hiring people who do and they’re the ones consuming the research, not clients.
  • I think we’re seeing the investment field changing so quickly before our eyes.  On one hand, we’re seeing investors go boutique and sign up with independent financial advisors.  This is like more full-service than full-service.  On the other hand, we’re seeing investors retake the reins of their portfolios and managing things on their own — classic DIY investing online.  There is also a middle ground of investors who want more control but also want professional advice to support them along the way.  Regardless of the model, someone is consuming research, whether it’s the client or the advisor.
  • We need new business models to foster more independent research to fill the gap left by Wall St.’s void.  Tools to rate accuracy and trust-worthiness.  Performance.  From individual positions in a portfolio to the dynamics of portfolio management in general.

Interesting to see that most of the firms polled in the WSJ article were not planning on continuing distributing independent research.  Some have jettisoned research while others are bolstering their efforts.  That still leaves a tremendous opportunity out there for anyone who can provide actionable advice to the majority of investors out there.

Additional Resources

E*Trade further blurs lines between full-service and DIY investing

Full(er) Service and DIY Investing: Investor Fork in the Road

There is no doubt we are witnessing a wholesale exodus of assets out of full-service brokers like Merrill Lynch and Smith Barney. These assets seem to be finding two very different types of homes:

  1. boutique investment advisory houses: Built by brokers/advisors who themselves have defected from the large wirehouses, these firms take service and advice very seriously. In some sense, they’re a further move into full-service. They are competing head-on with traditional brokerages by upping the ante on technology, service and investment advice.  Investors who feel slighted by their advisor and want the extra hand-holding find this model really attractive.  It’s interesting to note that many of these firms are being founded/built by traditional brokers evolving to this model.
  2. online brokerages: Firms like E*Trade and Ameritrade are taking the bulk of this business.  In the wake of the financial tsunami, some investors are looking to take back investment decisions and don’t want to pay someone else for underperformance.  Proof of this is in capital flowing to online brokerages.  E*Trade reported that it had net new accounts of almost 30,000 in the first quarter of 2009 with $3.5 billion in net new customer assets.

I’ve written about the emergent trend towards high end investment advisors and how traditional stock brokers are resurrecting themselves and building smaller, nimbler firms with their billion-dollar books of business.  I’ve spent less time discussing how online brokers are luring assets.

Online Advisoretrade_onlineadvisor

I had the opportunity last night to have a guided demo of a recently-launched E*Trade product, Online Advisor, with E*Trade’s Liat Rorer, VP of Investment Products.  Online Advisor, developed as part of E*Trade’s newly-minted Investor Resource Center, is a nifty little financial planner-in-a-box.

In a quick and easy 4-step process, Online Advisor: Continue reading

Two options for future of financial advice according to Investment Advisor’s Clark

Investors reflect

We’re all trying to figure this out.  Individual investors are thinking hard about the entire investment process and the future of their holdings.  Tough questions like expected future returns.  Like can I meet my retirement goals?  Like the value advisors are providing.

Financial advisors are also doing some soul searching

crossroadsAdvisors are doing the same type of soul searching and also asking hard questions.  Am I providing value?  Am I offering the best service to my clients now and how am I positioned to do that in the future?  At least some of them anyway.  Bob Clark at Investment Advisor magazine has always dealt with issues.

In his most recent article, Clark describes the history of financial advice.  According to Clark, advisors enjoyed a golden age of investment advice which was driven by low taxes, negligible inflation, and a booming stock market.

So, in light of what’s occurring before our eyes, Clark asks:

But what happens if the “Golden Age” is coming to an end? The Federal deficit that exploded under Bush and seems to be spiraling out of control under Obama has the potential to choke off our economic recovery for the foreseeable future. If that happens, creating volatile “trading range” markets with little or no overall gains, investment success will shift away from allocated buy-and-hold portfolios that take what the market gives, to stock picking, market timing, commodities, and dare I say, speculation.

I have no idea whether Clark is right but assuming he is, Clark envisions a financial advisory business that needs to step-up and provide real-time advice that takes advantage of the ongoing volatility in the markets.  Not buy-and-hold.  If that’s the case, Clark envisions two options:

    1. hire talent: Since most advisors are more generalists than experts in broad economic issues, Clark suggests that we’d need to hire these types of experts.  It’s a possibility — an expensive one, but certainly, there may be room for more Chief Investment Officers at boutique, independent investment houses.  Ultimately, Clark feels the cost may not support the benefit for such hires.
    2. continue to outsource investment advice: Clark weighs in with this answer. In addition to the savings in “in overhead from not managing client portfolios or dealing with backoffice, trading, confirming, reconciling, reporting, etc. more than offsets the additional expense”, Clark feels this solution further places the advisor on the side of his or her clients by helping to manage this process.

    I heard from Cathy Curtis (check her out on Twitter as well here) who runs a chic, financial planning firm addressing specific needs of women yesterday who said that “My problem with outsourcing portfolio management -another layer of fees for client…how much are they willing to pay?”.  It’s a good point and one that will need to be explored.

    So, where does that leave us?

    • Financial Advisory business:
      • Skillset changes: Will the trends to outsource more actual fund management increase with a demand for more niche, specific skill sets?  Or, will advisors start to bring this competency in-house?  I tend to think that the former (outsourcing) will trump hiring or becoming domain-experts.
      • Value proposition: How do advisors continue to market their value prop?  Is being really down, but not down as much as major indices enough?  How do fees play into this?
    • Investors:
      • Do it yourself: Will there be a larger move to DIY (Do-it-yourself) investing or after the pummeling, will investors turn to professionals to help sort things out?
      • Buy and hold: With the mantra that buy and hold is dead, is this really a good thing for investors?  Indices were way down last year but Citibank was down way more.  Do I really want to be picking my own stuff and get into trouble?

    I am not pretending to know the answers to any of these questions but the financial advisory business seems to be facing a crucial, defining moment right now as pros and individuals alike are reassessing the roles of financial markets.

    Further Reading: Check out an article we’ve written about the future of the investment advisor and where the business for some advisors may lead.

    Don’t forget to sign up to receive free updates from New Rules of Investing.

    Great idea for a fresh investment letter: mimic Senators’ portfolios

    In previous posts, we’ve explored the process of picking a theme for your newsletter.  This is an important process because it really defines everything that you’ll be doing as part of your newsletter business.

    • It will define what goes into your portfolio
    • By deciding to go broad or narrow, your theme can differentiate you from your competition
    • Different themes fall in and 0ut of favor during different market cycles
    • The theme can mean the difference between making a little money and making lots o’ cash along the way

    us-senate-logoSo, are you looking for a fresh idea to start a newsletter?  How about a new market-beating portfolio for inclusion in your existing portfolio?

    Reading a great article on Compliance Building today, I stumbled upon a great idea that’s fresh, creative, requires some research, should sell well in subscription format and historically, makes investors money.

    It turns out that a 2004 research piece by Professor Alan Ziobrowski of Georgia State University showed that US Senators’ personal stock portfolios outperformed the market by an average of 12 per cent a year in the five years to 1998, beating even the average return on portfolios of corporate insiders.  According to the author of the study:

    The results clearly support the notion that members of the Senate trade with a substantial informational advantage over ordinary investors.

    Turns out, that Federal law does require Senators to disclose their common stock transfers annually in their Financial Disclosure Reports.  While this only happens on a yearly basis, the information should make for interesting portfolio composition.  Stocks in blind trusts, by the way, were not included in the study, but that shouldn’t matter anyway.

    So, what about putting together a portfolio comprised of the best and most ardent of picks from the U.S. Senate? You could segment out Democrats vs. Republicans.  You can see how Senators are positioning themselves in front of some of President Obama’s energy plans.  The study found freshman senators performed well.  You could pit 1st years against their more senior peers.  I dunno, could be quite interesting.

    You better hurry, though.  There is legislation being pushed by U.S. Representative Brian Baird to close this loophole and “prohibit securities and commodities trading based on nonpublic information relating to Congress.”

    Don’t forget to check out our ebook available for free download, How to Start a Profitable Investment Newsletter.  I’ve also posted important resources to build and run a newsletter.

    And if you like what you see, please sign up to receive free updates from New Rules of Investing.

    How the Internet is influencing equity research

    Interesting presentation from an O’Reilly Webcast by Robert Passarella. According to his O’Reilly bio: “Robert Passarella has spent over 18-years on Wall Street in the gray zone between business and technology…focused on leveraging technology and innovative information sources to empower Equity Research and serve clients. A veteran of Morgan Stanley, JP Morgan, Merrill Lynch, and Bear Stearns…

    …Rob is passionate about leveraging alternative data and news provided by the Internet for investment analysis. Robert holds a BBA in Finance from Baruch College and an MBA from the Columbia Business School.”

    It’s a good watch but a tad long (it’s over 1hr).

    Couple of interesting points:

    • gives a lot of credence to the rise of financial bloggers, aggregators and independent research sources for use on by investment firms
    • thinks the whole “buy, sell, hold” model of sell-side research is commodity now
    • abundance of info (from horrible to really good) is just amassing outside of traditional research channels, some of it “just waiting for analysts to connect the dots”
    • exodus of professional analysts out of ibanks leading the trend towards independent research combined with commission sharing agreements: barrier to entry low, good little business
    • 75% of journalists consult blogs to get ideas for stories
    • key is to take publicly available information (like from Amazon) and transform it into investable information/within human context of financial models/compare data sources
    • different business models competing against traditional research models (mentions SeekingAlpha’s ad revenue and blogger revenue streams)
    • out of ashes of crisis, lot of creativity and entrepreneurship plus low costs and easy-to-use distribution tech will prove fertile ground for new products, services, models in investment research

    [Hat tip: IR Web Report, a great read, turned me onto this presentation.]

    Top 11 Investing 2.0 Thought Leaders

    the_thinker_auguste_rodinThere are many new faces on the scene in online finance.  As we move away from mere trading platforms and portals to more social media-like applications, we’ve taken a stab to enumerate some of the top thinkers/movers/entrepreneurs in the space to keep tabs on.

    I used a variety of slippery factors like vision and influence and combined it with the track record of the individual/firm and then threw it into a blender.  The list below is in no particular order.

    Top Finance 2.0 Personalities

    1. Steve Carpenter, CEO/Founder, Cake Financial: Cake has risen to prominence by layering an analytical layer on top of clients’ existing investment accounts to help make sense of what’s going on and make better decisions in the future.  Steve has been an outspoken investor advocate promoting the need to understand the investment process and learn from others.  Because Cake has processed data over 1,000,000 retail transactions, the firm is in a great place to provide network level statistics into buying and selling as well as help investors learn from one another.
    2. Aaron Patzer, CEO/Founder, Mint.com: Well, Aaron’s voice has been heard as far as Davos. Helping over 900k users track their expenses and lower their burn rate, Mint has quickly risen to prominence in a field dominated by offline giants like MSN Money and Quicken.  With this view into consumers’ pocketbooks, Mint has an interesting perspective in what’s happening at the macro level.
    3. Perry Blacher, CEO/Founder, Covestor: Covestor is the leading portfolio sharing service where investors subject their trading activity to an audit as a check for authenticity.  In the future, I expect Covestor-like communities to be a leading channel for smaller asset managers to market themselves and their strategies to willing investors.  Covestor is syndicating some of its participants’ trading logs for publication on TheStreet.com, bringing this model more into the mainstream.
    4. Felix Salmon, Reporter, Portfolio.com: How is it possible for someone to write so much content that’s always good?  Salmon is seemingly ubiquitous these days and from my perch, seems to have found his voice and sway during the financial meltdown.  Salmon is a big proponent of the financial blogosphere and has used his mouthpiece to shine a lot of light on some great new econobloggers.
    5. Darrell Heaps, CEO/Founder, Q4 Web Systems: Q4 has built an enterprise level content management system (CMS) used by publicly traded firms to communicate their financials.  Think of it as WordPress for compliance-focused corporations.  As an SaaS application, it’s pay as you go and accesible over the Web.
    6. David Jackson, CEO/Founder, SeekingAlpha: David was very early with financial blog content aggregation.  The money quote: “We’ve basically taken a whole investment bank research department and turned it on its head.”  SeekingAlpha has given a voice to financial bloggers, both small and large and given its landmark deal with Yahoo Finance, took financial blogging into the mainstream.
    7. Paul Kedrosky, Speaker/Analyst/Investor, Infectious Greed: Dr. Kedrosky is everywhere you want him to be these days talking about the markets and the systems that power them.
    8. Dominic Jones, Principal, Clarity! Communications: Dominic has been extolling the virtues of adopting new technologies and social media for corporations and the investor relations professionals who represent them.
    9. Roger Ehrenberg, Analyst/Investor, Information Arbitrage: Ehrenberg’s backround as a derivatives trader/salesmen/general Wall Street guy enables him to take an inside look into what’s unfolding currently in the financial world.  Ehrenberg is also a seed investor and gets an up-close view on new ideas/products coming online in the investing space.  He was an investor in the well-documented flameout of Monitor 110, a highly-touted next generation research platform and has helped launch StockTwits.
    10. Barry Ritholtz, Analyst/Founder, The Big Picture: Ritholtz’s popularity has continued to rise as the investing public’s demand for strong opinion has increased.  Barry scours financial data and info on alert for any BS.  There is also a premium subscription product Ritholtz’s sells to leverage his research.
    11. Planet Money, Multiple Contributors, NPR Show/Podcast: As a professional, I find Planet Money’s daily podcasts entertaining and enlightening.  Designed to help non pros make sense of financial news, the programs contain great interviews, explain leading indicators, and help everyone better understand the tumultuous financial seas around us.

    Think someone else belongs on this list?  Let me know in the comments or email me at zack.miller @ gmail.com

    Photo credit: Wikimedia Commons