Simon Roy prefers computers to professional money managers because machines don’t work on commission.
The dark truth about the financial services industry is that brokers such as those found at a big bank branch or a strip mall often receive a cut from mutual fund managers when they make a sale. Brokers tend to lean toward the funds offering higher commissions, regardless of their performance. And that bias can result in a bad buy for the average Joe investor.
Jemstep aims to remove the bias with its money-management website, which lets retail investors import their retirement-account data and get automated advice, said Roy, the startup’s president. Jemstep offers free advice on asset allocation and will charge a flat monthly fee, starting at $18 per month, based on the size of the user’s retirement portfolio in exchange for suggestions about specific funds to buy and sell. Because Jemstep doesn’t play the fund-commission game, the Los Altos, California-based startup typically recommends inexpensive index funds, instead of the pricier mutual funds that brokers seem to love.
“The incentive structure under which brokers operate is designed to serve the interests of institutions, not the interest of investors,” said Roy, 51, in an interview. “Our advice is objective and untainted by any third-party influence.”
Jemstep began offering its automated portfolio manager to the public in January as a free service and has built up its membership to about 2,000 users, including employees at Google and EBay. For those managing less than $25,000 in retirement assets, the service will remain free. The price to manage larger portfolios can be as high as $70 per month, including portfolio analysis, tracking and rebalancing advice.
Backed by $10.5 million in private funding, Jemstep is among a growing class of startups aiming to tear down the traditional brokerage world by providing cheaper advice and more transparency. SigFig offers weekly suggestions for saving money and improving investment performance. FutureAdvisor, backed by Sequoia Capital, says it can help consumers save as much as 80 percent on fees by optimizing their portfolios.
Jemstep was founded in 2008 by Michael Blumenthal, a former stockbroker who is now the company’s co-chief executive officer. Jemstep has 20 employees split between the U.S. and Johannesburg, where Blumenthal is based.
The startup developed its recommendations by working with Windham Capital Management, a Boston-based firm with about $1 billion invested in stocks. The portfolio manager makes general suggestions, such as how much to allocate to international equities or when to lower exposure to U.S. stocks. The next step involves telling customers exactly which funds to dump and which to purchase.
“We’re trying to help people take action,” said Roy, referring to consumers’ tendencies to do nothing rather than seek out costly advice.
Considering Wall Street’s reputation lately, trusting a startup with our financial futures doesn’t sound so crazy.