CMO Interview: Erik Jepson of Personal Capital

Personal Capital is in the vanguard of a new wave of startups seeking to disrupt the $10T wealth management industry. Others in this space include Betterment, FutureAdvisor, Jemstep, LearnVest, SigFig and Wealthfront. Each is leveraging technology to deliver effective, low-cost, conflict-of-interest-free investment insight and advice to Americans who range from the mass affluent to the truly wealthy.

Personal Capital offers account aggregation and detailed portfolio and personal financial management analytics to everyone free of charge.  The key insight that differentiates Personal Capital from most wealth management 2.0 entrants is the importance of a human financial advisor. Clients with more than $100,000 can work one-on-one with an individual Personal Capital advisor to develop personalized strategies to meet their financial goals. Fees for investment management start at 95 basis points and decline as assets rise.

Founded in 2009, Personal Capital has raised nearly $55M raised to date and has over 100 employees. Key investors include IVP, Venrock, Crosslink Capital, and the world’s largest investment management firm, BlackRock. More than 500,000 registered users track over $60B of assets using their free services.The company manages more than $620M in assets, and has over $5M in annualized revenue. It reports ongoing 10% month-over-month growth.

Automating the production of financial plans and investment advice isn’t a new idea. We gave it a shot at Scudder Stevens & Clark, on a very small scale, in the 1990s. The key challenges for these wealth management 2.0 companies, in my view, are in marketing. Meaning:

  • How do you acquire users cost-effectively?
  • How do you migrate users from your free services to fee-based investment management?
  • Lacking a long-term investment track record and a well-known brand, how do you convince investment management clients to entrust you with a significant share of their assets?

So who better to talk to on the topic than Erik Jepson, Personal Capital CMO.

Q.   The members of this next generation of automated investment advisors are sometimes referred to collectively as “algorithmic advisors” or – somewhat derisively – as “robo advisors”. Erik, how do you describe Personal Capital’s services? Are you a digital wealth manager? A digital financial advisor?

A.   We do not think of ourselves as a Robo Advisors because personal relationships are central to our business. Every investment client is assigned a two-person advisor team. That team of advisor works with the client to create and implement and investment strategy, and provides ongoing advice over the life of the relationship. However, we also leverage technology in every aspect of our customer experience – everything from offering electronic modes of interaction with your advisor, to scalable asset management services, to our mobile and web-based personal finance dashboards that allow you to aggregate and view all of your financial accounts – not just the ones you have with Personal Capital – in a single consolidated view. So I guess you could say we are a technology-enabled wealth manager.

Q.   Who is your target market?

A.   Our clients range in age from 20s to 90s, but on average our clients are in their 40s. And we have clients in nearly every state – though they tend to be concentrated near major metropolitan areas. We tend to appeal to well-educated, highly skilled, tech-savvy professionals who lead busy lives. They are looking for a sophisticated and personalized wealth management solution, but the traditional Wall Street approaches don’t appeal to them. They are looking for a more modern experience.

Q.   How are you reaching them?

A.   In the beginning, many of our clients initially came to us through our free online financial dashboard and mobile apps. But increasingly, new clients are coming to us via word-of-mouth recommendations and referrals. We also advertise – mostly in digital channels.

Q.   Which channels have you found to be most successful for building and engaging with your customer base?

A.   Our clients lead active, digital lives, so naturally online and mobile channels play a central role in our customer experience. While we do offer clients the opportunity to meet with us in person in our San Francisco or Denver offices if they wish, most of our clients prefer to interact with their advisors via email, text, phone or chat. We also have a team of writers who contribute to our blog – Daily Capital – on a regular basis. Our clients can engage with that content via email, online, or through the dashboard.

Q.   Your clients have a median age of about 42 and median investable assets of about $460,000. How does that compare to clients of the wealth management industry as a whole?

A.   Different wealth managers target different segments of the market, but most traditional wealth managers tend to appeal to an older clientele. We are very focused on delivering a customer experience for the next generation of investor for whom technology-enabled solutions are integral to their lives.

Q.   To my mind, what differentiates Personal Capital from most other online, automated investment advisors is that you offer each customer access to a live, fully-licensed RIA who is a full-time employee of Personal Capital. Where do your advisors come from? What sort of experience do they have and what kind of training do you provide them?

A.   Our advisors tend to come from larger, more traditional investment management firms – including many brokers. They tend to be idealistic and customer-centric. The fact that we are an RIA and have a fiduciary obligation to our customers is important to them. And the fact that we are trying to disrupt the old way of doing things in the investment industry is inspiring to them.

Q.   It seems that in utilizing personal financial advisors, you are probably closest to LearnVest. Is that a fair assessment? Can you compare and contrast Personal Capital with LearnVest?

A.   I think LearnVest is great if you have relatively simpler financial needs, and are comfortable managing all the transactional aspects of personal financial management by yourself. But we are different in that we are a digital wealth manager – not only do we give you ongoing advice, but we will also manage your money for you, and give you tools to make sense of your entire financial life.

Q.   What does the Personal Capital brand stand for and what are some of the things you are doing that really make the brand come alive?

A.   Our brand stands for what’s next in wealth management – high tech meets high touch. We make the brand come alive for our customers through our people and our technology: people who are energetic, passionate and dedicated; and technology that is simple, intuitive and smart.

Q.   One thing that stood out about Personal Capital from the very beginning is your commitment to delivering an outstanding user experience across platforms and the attractiveness of your mobile apps. How much of your traffic comes from mobile apps? Can you break down tablet vs. telephone vs. web site usage?

A.   Most of our users and customers tend to use more than one touch-point, depending upon where they are and what they are doing. Frequency of use is tied to the device. We have a lot of our frequency on mobile, especially the iPhone, but we find that iPad and web have similar usage patterns with users doing more deep dives into their finances. For example users check their balances, transactions, and portfolio multiple times per week on the phone, but may only look at their cash flow, an investment checkup, or their allocation weekly or monthly on the web and iPad.

Q.   How are you using data and analytics to improve your marketing?

A.   We use data extensively in every step of the acquisition and conversion funnel, as well as in the user experience around the software, and also within our overall customer experience. Beginning with acquisition, we funnel data on converting customers to develop look-alike models to target likely converters through paid channels. We are constantly testing new channels, tactics and messaging across all acquisition campaigns. Once a user registers, we segment them along various criteria and engage them through outbound campaigns. We leverage product usage data to prioritize enhancements. And of course we engage users and customers through qualitative and quantitative research to identify opportunities to improve acquisition and whole range of customer experience.

Q.   We all know that inertia is one of the strongest forces preventing people from getting their investment lives in order. How do you motivate prospects to take action?

A.   The tools in our aggregation software provide a powerful incentive for people to examine their current financial health in a very low-risk way. Tools like our 401k Fee Analyzer, Investment Checkup, and Mutual Fund Fee Analyzer are offered for free as part of the online dashboard and mobile apps. If we spot a user that can benefit from our wealth management offering, we conduct outreach and offer a free, personalized investment consultation. Most people are delighted to be offered a second opinion – especially when it comes from someone with a fiduciary obligation to the client.

Q.   Over half of investment assets under management at Personal Capital has come from Fidelity, Schwab, E*Trade, TD Ameritrade, Merrill Lynch, Wells Fargo, Morgan Stanley and Edward Jones. Is the rest coming to you from formerly self-directed investors?

A.   No – our clients’ run the gamut from former online brokerage customers to former wire-house and independent customers. One thing that unites them is the feeling that they weren’t getting the kind of help they needed from those old-fashioned services. But there are differences, too. People who come to us from the traditional brokers often were given bad advice in the past – for example, they were sold high-fee products that lined their brokers pockets, but didn’t do much to help the customers themselves. Other traditional brokerage customers tell us that they were simply ignored. Former online brokerage customers tend to feel like they needed advice – but that their brokers simply didn’t want to be bothered to help them.

Q.   How are you moving people from free to paid services?

A.   We find that most people that sign-up for the free service are not managing their portfolio optimally. Because of our analytics capability, we can identify those users very quickly, pinpoint some of their problem areas, and notify an Investment Adviser who will follow-up via phone with some potential ideas for improvement. Once the Investment Advisor has spent some time getting to know the clients personally, he will work with our Investment Committee to construct an investment recommendation for the prospect. All of this is done for free. At the end of the investment recommendation, the prospect can decide whether or not to move their assets over to Personal Capital to manage.

Q.   Investment management clients give Personal Capital trading discretion. How much control over investment decisions do clients have after they sign up?

A.  We do offer individual customization of investment portfolios. For example, because we hold individual stocks in the US Equity portion of client portfolios, we can exclude “sin” stocks if a client wishes. As another example, many of our clients work in technology-related fields and have significant stock option holdings in tech companies – so we can reduce their portfolio exposure to technology stocks if it makes sense. We can also hold individual bonds for clients in certain situations.

Q.   Can investment management clients keep positions in specific funds or securities once they are investment management clients, or are they asked to liquidate their holdings, which could entail a significant tax hit?

A.   We often incorporate existing holdings into a client’s strategy in order to minimize taxes. Taxes are managed based on each client’s specific tax return. Between tax allocation across accounts, tax loss harvesting, and gain deferral we believe our tax management is much more efficient than most other managers.

Q.   Is it fair to say that Personal Capital is opposed to the use of mutual funds?

A.   Yes. We think Mutual Funds are wrong for most investors due to tax inefficiency and high fees and/or loads. They were a decent diversification vehicle in their day, but that day has long since past.

Q.   Personal Capital uses tactical weighting as opposed to capitalization weighting in construction of its portfolios. You call this “Smart Indexing”. Is Smart Indexing a flavor of smart beta?

A.   Yes – to the extent that Smart Indexing does not follow the traditional market-cap weighted approach to investing in US equities and is not based on stock picking. But unlike some smart beta approaches that make bets on a certain factor like small or value, ours is designed primarily to increase diversification. Essentially we seek to achieve more even exposure to the most important factors like sector, size and style. Our research shows this can boost performance over time, but it also protects against sector or style bubbles.

Q.   Personal Capital’s free services are most valuable to customers who give you access to their entire portfolio. Does this imply that your best prospects are tech savvy investors who have a larger percentage of their accounts online-accessible?

A.   The term “tech-savvy” certainly applies to many of our dashboard users. They tend to be busy and active, and appreciate our free software and mobile apps for helping them bring order to – and make sense of – their financial lives. But many people also come to us directly for an investment consultation with a financial advisor – another free service we provide – without ever using the dashboard. They get a lot of value out of that direct personal interaction – even if they never use the software.

Q.   What can you do for less tech-savvy investors who might really benefit from Personal Capital when it comes to enabling online access to all their investment, retirement, banking and credit card accounts?

A.   If an investor needs our help enabling online access to their accounts, we are happy to do so.

Q.   Are defined contribution plans still an area of priority for you?

A.   Not in the sense that we are currently focused on providing defined contribution plan services to other businesses. We think the best opportunity right now is to focus on making our consumer offering best of breed.

Q.   Are you making your platform and capabilities available to non-Personal Capital advisors? Betterment and Motif offer versions of their platforms to unaffiliated RIAs.

A.   No.

Q.   What are your plans to offer clients banking or life insurance alternatives?

A.   We have no plans to offer banking or life insurance alternatives at the present time.

Q.   What kind of usage are you seeing for the universal checkbook? (Universal checkbook allows you to send money to anyone, anywhere, from any checking account.)

A.   A universal checkbook is something we have beta-tested in the past, but is not currently part of our product offering.

Q.   I hear you’re hiring.

A.   Yes! As you know, we are growing extremely rapidly. We grew clients and AUM by 400% through last quarter. As we grow we will continue to add staff to ensure we deliver a best-in-class customer experience for all our clients. (Go here for a list of current openings.)

Q.   What can we expect next from Personal Capital?

A.   More growth. More innovation. More disruption. I can’t talk about all of the technology projects our engineers are working on, but suffice to say there is much more to come!