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Other head-scratchers from the LA-based robo include its sweet 1% checking account and its tithing of assets
November 30, 2015 — 11:49 PM UTC by Lisa Shidler
Brooke’s Note: Out of the box or out of their minds? You be the judge. In the history of business plans has there ever been one quite like this one? Don’t try this at home but do follow this interesting story to see where it leads. If Aspiration’s $15 million-plus of new VC backing is any indicator, smarter people than me see merit in what Andrei Cherny, an ex-politico, is doing. While Aspiration has an old school, mutual fund-direct-to-consumer model, and a somewhat complex layering of fees, everything else screams millennial in that it trusts the consumer not to screw it rather than the other way around. Bottom line: If Aspiration is any indicator, a robo can attract $1.30 in VC money for every $1 in AUM it gathers in year one.
The policies of robo-advisor Aspiration Fund Advisor LLC diverge so greatly from the norm that it’s hard not to regard the firm as the entrepreneurial equivalent of a death wish — or at least naive as hell. See: New robo-advisor, Aspiration, gets ex-eBay head as backer and 40,000 on 'waiting list’
The Los Angeles-based firm is advertising pay-if-you-want-to fees, is tithing its revenues and is putting a cap on how much business a single customer can bring to the firm. It also pays out a sweet 1% yield on cash balances by utilizing a bank originally established for carpenters in Boston.
Amazingly, this soft approach has just attracted additional hard cash to the tune of $15.5 million in funding from venture capital and angel investors including Addepar Inc.'s Joe Lonsdale. And it has even convinced a hardcore wirehouse — UBS — to participate in its future-leaning yet back-to-the-past approach.
Lonsdale, who founded Mountain View, Calif.-based Addepar, made his first hundred-million by co-founding Palantir Technologies in 2004, which is now one of the world’s largest private companies. He’s now ponying up his own money for Aspiration’s most recent funding round, one led by Renren Inc., a Beijing a social networking and finance Internet platform. Also taking part in the round are GSV Capital, Capricorn Investment Group LLC and VentureDeal Inc., as well as angels David Bonderman, Gordon Crawford, Matthew Dowd, Rick Hess, Bill Lee, Alexis Maybank, Lenny Mendonca, Steven Rattner, Dan Rosensweig, Matthew Salzberg, Joseph Sanberg and Frank Yeary.
Aspiration’s original angel, Jeff Skoll, who headed eBay until Meg Whitman took over in 1998, led the first round of funding, kicking in about $1 million. Skoll, eBay’s first employee, took $2 billion with him when he cashed out of eBay.
No minimum but a maximum
One big way in which Aspiration differs from other robos — indeed from other RIAs — is its $100,000 maximum investment rule. Cherny says the cap is an act of internal discipline as much as a business decision or an attempt to curtail investor allocations to a single fund.
“Having the $100,000 limit is more of a signal for ourselves as a team reminding us about who we are here for and who we are championing.”
Another twist is the firm’s “Dimes Worth of Difference” policy in which it donates ten cents of every dollar to a charity focused on “bringing economic opportunity to struggling Americans,” according to Aspiration’s website.
But even more of a mind-bender is Aspiration’s fee structure — or, more accurately, its lack of one. Clients pay what they wish — or nothing at all. About 90% of investors choose to pay, Cherny says.
That said, Aspiration’s flagship product has a whopping — by robo standards — built-in fee. Investors who choose to pay Aspiration nothing are subject to underlying asset management fees of about 1.35% a year. That breaks down to .5% to offset operating expenses like legal and administrative services and .85% from underlying funds in the manager-of-managers product. Aspiration does not participate in any revenue sharing of the fees received by its money managers.
Most robos charge .3% plus .2% in underlying investment management fees but Cherny maintains that his Flagship Fund is worth the extra expense. Though he declined to disclose its returns, he stated this in an email:
“We offer our customers various investment options they can choose from. If they had put all their funds in the Flagship Fund this year they would not have lost nearly as much as if they had put it into an index fund or a robo-advisor such as Wealthfront Inc. or Betterment Inc.. The Flagship Fund performed as we had hoped: holding down losses that investors would have had if they had been in one of those other options.”
The firm’s Flagship Fund is a mutual fund managed by Lancaster, Pa.-based Emerald Advisers Inc., which invests in alternative funds that pursue hedge-fund-like strategies including arbitrage and long/short trading. See: Now come the robo-alts firms — a full flock of 'em as unwavering as the robo-advisors.
At press time, neither Wealthfront or Betterment responded to a request for comment.
UBS in the game
The Redwood Fund, a new mutual fund offering from Aspiration, focuses on sustained strategies. Aspiration has contracted UBS Asset Management to sub-advise it.
Getting UBS onboard and convincing the bank to agree to its “pay what is fair” method was no problem, according to Cherny. Indeed, he says UBS also agreed to donate 10% the revenue associated with the Redwood Fund it is managing to charity.
Another advantage of the UBS fund is that it invests in stocks directly so there are no underlying management fees — except for 50 basis points of legal and administrative costs.
“They were eager to get involved. They wanted to do business with us. I think they really understand that part of the reason Aspiration has seen the type of growth we’ve seen is because we do things very differently.”
UBS did not return emails seeking comment for this story but through a statement announced that Thomas Digenan, head of the U.S. Intrinsic Value Equity team, and Bruno Bertocci, head of the sustainable equities team at UBS Asset Management, will act as portfolio managers for the Aspiration Redwood Fund.
“We’re thrilled to work with Aspiration to bring sustainable investing to the everyday investor,” Bertocci said in the breathless statement. “We have seen from our clients that investors are more conscious than ever about where they are putting their money, and the Aspiration Redwood Fund is the perfect stepping stone for the middle class to build value with peace of mind.”
The Redwood Fund, like the Flagship Fund, requires a $500 minimum. The Redwood Fund trades under the ticker REDWX.
Eye on millennials
Cherny says the UBS connection will give mass-affluent consumers access to investments that were previously kept on the top shelf for high-net-worth investors.
“Historically, companies like UBS have been offering these types of strategies only to their private wealth clients and these funds aren’t available to general investors.” See: A former exec of a Swiss private bank offers his insights into the country’s wealth management business and what innovations could redefine it.
The firm’s ADV, last updated in March, states that Aspiration has $2.1 million in AUM and 600 clients. Cherny says Aspiration’s managed assets have since grown to about $11 million, a rate surpassing industry peers in their first one-year period of existence. Over the past nine months, he says, Aspiration doubled its number of accounts every six weeks.
Cherny says it was obvious to the leadership at UBS that appealing to mass affluent and younger investors is essential.
“That’s why UBS came to us from the very highest level of the company. They understand that they don’t have in this day and age a connection to millennials and to every day investors. This was a way for them to partner with a firm that does that. Most of our clients are millennials and 68% of our clients have no other investment products.” See: Wealthfront responds with force to Schwab CEO’s robo announcement.
Aspiration has four engineers on staff and is planning to use the $15.5 million infusion to hire more.
... and free checking
Unlike most robo-advisors, Aspiration also offers checking-account services for its clients. The Aspiration Summit Account pays 1% interest, has no minimum balance requirement or monthly service fees, Cherny says. It’s an approach that bears some resemblance to MaxMyInterest. See: NAPFA is small, pure and aching for an elevator pitch — but the perfect place for NYC-based MaxMyInterest to debut.
Aspiration is using Radius Bank to administer its checking program, a bank with a strong affinity to the working-class customer: It began its life as First Trade Union Bank, founded In 1997 by the Massachusetts Carpenters Combined Pension and Annuity Funds. The bank is still used by unions and pension funds and has assets of more than $725 million.
In a final bizarre twist, Cherny nostalgically cites two defunct brokers as models for his business.
“Twenty-five years ago there was a Smith Barney and a Dean Witter in every Sears in America and those have disappeared. What we can do online is uniquely create a financial firm for everyday investors.” See: Marty Bicknell jumps into the mass market with no 'robo-advisors’ and a missionary zeal.
Mentioned in this article:
Top Executive: Andrei Cherny
Portfolio Management System
Top Executive: Eric Poirier
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