Personal Capital ventures into online-advice arena

With Americans practically addicted to the Internet, a web-based investment advisory business would seem to be an idea whose time has come.

The founders of Personal Capital Corp. certainly hope so.

Bill Harris, the former chief executive of PayPal and Intuit Inc., and Rob Foregger, a co-founder of online-banking pioneer EverBank, think that their online-only discount registered investment adviser, which went live last month, will be so successful that the firm and others like it eventually will form a channel as ubiquitous as online banking.

Personal Capital offers individualized investment portfolio management through financial advisers who interact with clients online. The firm invests in exchange-traded funds and individual securities, which are managed for tax efficiency.

“The entire financial services industry has been on a march from a paper-based, heavily brick-and- mortar approach to a digitalized approach,” said Mr. Foregger, the firm’s chief strategy officer. “The next shift is from traditional advisory to next-generation financial advisers, from an offline advisory experience to one that is highly automated.”

To help pay for that march into the future, Personal Capital received $25 million in venture financing in August from Institutional Venture Partners and Venrock, the former venture capital arm of the Rockefeller family.

So far, however, the road to online advice has been littered with attempts that haven’t delivered as promised.

In 1999, famed Silicon Valley entrepreneur Jim Clark launched myCFO Inc., which was envisioned as an online financial advisory firm for ultrahigh-net-worth individuals, many of whom made their millions through Internet ventures.

The offering was an online dashboard through which clients could access their holdings as well as tap a dedicated team of certified public accountants and attorneys.

After failing to attract many clients beyond an inner circle of Mr. Clark’s friends — and on the heels of a federal investigation into tax shelters the firm sold, which later led to the conviction of one of the firm’s tax attorneys — myCFO was acquired by Harris Bank in 2002 and now operates as Harris myCFO Inc., a large and successful bricks-and-mortar family office.

In 2006, Thomas Vass launched an Internet-based investment advisory service called MyOwnFund.com, which offered investment management customized to a client’s goals and risk tolerance. It functioned like an “online customized mutual fund,” according to Mr. Vass, who said that the service never took off, because it “was just too early” for the market.

He shut it down a few years later.

Mr. Vass, an investment adviser in Raleigh, N.C., with Investment Management & Insurance Advisors Inc. is also president of The Private Capital Market Inc., which helps private technology companies raise capital.

Today, Mr. Vass believes there is a big market for online investment advice, especially via mobile devices, but only if prices come down.

“We have got to break free of the 1% or 1.5% fees based on assets and move to fees that users don’t find objectionable,” he said. “We also have to scale down investment advice to the level of service those independent-minded, do-it-yourself investors need.”

He believes the winning formula is going to be an online application that runs on mobile devices, much like free app Wikinvest Portfolio HD.

One low-cost service, MyPortfolio Guide.com, has offered online investment management for the last two years at a rate of about 50 basis points for accounts up to $500,000, according to company president and registered investment adviser Matthew V. Pixa, who manages about $40 million in assets.

He believes a 1% fee is too high whether the client is online or in the office, and he charges all of his clients no more than 50 basis points.

“We find that a lot of folks just want some clear advice,” and in order to keep costs down, he dispenses with the “fluff” that most clients don’t find useful, such as frequent in-person meetings. Even so, he believes that a substantial percentage of clients would not want to conduct their entire relationship online, and “want to meet in person,” at least sometimes, he said.

Mr. Foregger pointed out that the prices Personal Capital charges are lower than the nearest alternatives, but after a September profile of the company in The New York Times, many readers commenting online said they would never pay the company’s fees.

Personal Capital charges an annual fee that scales down from a top rate of 95 basis points for $100,000 of investible assets, which Mr. Foregger said is less than investors of that account size would typically pay an RIA if they could find one willing to take an account of that size.

“A lot are directed into the online self-service brokerage bucket and they have nowhere else to go,” he said.

Most online brokerage firms offer advice in some form, of course, as do some employer-sponsored savings plans, which may arrange with an online provider such as Financial Engines Inc. to provide investment and planning advice at no charge to 401(k) plan participants.

To compete in this lower-cost market, Mark Cortazzo, senior partner of independent adviser Macro Consulting Group LLC, launched a separate online investment manager called Flat Fee Portfolios that offers a choice among 50 model portfolios at a flat $129 monthly fee for accounts of less than $250,000 and a flat $199 monthly fee for accounts of $250,000 and up.

Although that dollar amount translates into about a 1% fee for the smallest accounts, it’s equivalent to a fee of about 25 basis points for investors who have at least $1 million, which is at the high end of his target-market range.

So far, fewer than 50 investors have signed up, which Mr Cortazzo said is due partly to the bad economy and the volatile stock market.

“We have made a lot of follow-up calls, talking with clients about how well we held up in the recent markets,” he said. “One of the interesting things we have heard is that clients question how our service can be as good as it is if it’s that cheap.”

Some of the Flat Fee Portfolio clients are paying 1.8% a year elsewhere, and their money is in index funds, Mr. Cortazzo said.

“What we are fighting against is the status quo and inertia,” he said. “When people sit down and understand it, they say, “Wow, this is nice.’”

Email Lavonne Kuykendall at [email protected]