MarketRiders Automates the Financial Advisor, Sort Of


MarketRiders, an online investment service that promotes proper asset allocation and low fees, wants to be the electronic answer to the financial advice industry.

For a small fee, MarketRiders’ software will generate customized asset allocation recommendations. By cutting out the middleman, MarketRiders has potential to offer returns similar to existing fund managers’, but without the hefty fees.

When you sign up, its investment engine, called E.Adviser, asks you several questions about your investment time horizon and risk tolerance. It then generates asset allocation recommendations based on your answers. Once you trade, E.Adviser tracks your progress and lets you know when to rebalance. The service costs $9.95/month, far less than a comparable suite of mutual funds.

The MarketRiders website explains the problem:

According to Morningstar, only 14% of the top 100 mutual fund managers in a given year were able to repeat their performance the following year. Over a five year period, 97% of the professional money managers underperform their index after fees and taxes! There’s probably not an industry that is so overpaid for providing so little.

Yet most investors continue paying investment management fees that, while seemingly small, easily siphon away 33% of their wealth over 15 years.

The financial industry’s abuse of the individual investor is part of what is causing a crisis in many American households today. Offended by this, Mitch, Steve and Ryan created MarketRiders.

TechCrunch has more on why MarketRiders was founded:

Mitch Tuchman, the founder of MarketRiders and a former hedge fund manager, studied the investment strategies of big university endowments like Yale’s. He learned that 80 to 90 percent of returns within any given year come from being in the right asset class (stocks, bonds, real estate, commodities, emerging markets), not from stock picking or market timing. The trick to steady returns is to try to mimic the market, not beat it, through exposure to broad asset classes. “Wall Street is the biggest fleecing machine in the world,” says Tuchman. “It is selling investors on the idea that if you give this manager money he will give you a better return than the market.”

A better strategy, he thinks, is simply to buy a variety of exchange-traded funds which index different markets and then periodically re-balance your portfolio.

The catch? E.Adviser only generates ETF portfolios. MarketRiders targets passive, risk-averse investors with $50,000 or more to put into the market. Why does the service only give specific tips on how to diversify within one type of fund? Most ETFs are cheap and relatively safe, but not foolproof.

I would be more interested in MarketRiders if it recommended a broader range of investment types. I would also be more convinced of its potential to replace human advisors if it wasn’t stuck on one type of fund. I wonder whether its target market has the same kinds of concerns, or whether they are so passive that they don’t think about ETFs’ potential limitations.

Do you think that as a business, MarketRiders is onto something? Do they need to expand their services, or are they targeting a lucrative niche with their strategy? Or are they just another computational flavor in an ever-expanding market?