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Investing in the Digital Age: Why real-time data is a must-have for RIAs and long-term investors

The investment industry has created a classist system of haves and have-nots when it comes to information

Wednesday, January 26, 2011 – 3:18 PM by Andy Rachleff, Columnist
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Andy Rachleff: Getting a minute-by-minute view into what your money managers are doing doesn’t necessarily mean you aren’t a long-term investor.

From software development to supply-chain management, from manufacturing to retailing, real-time information defines today’s business world.

But what about the investing world? Sure, everyone has real-time pricing, but I’m talking about RIAs having transparent access to the real-time actions of their money managers.

For example, wouldn’t it be great to know if your money manager strayed from her historical investment behavior? I would like to know if my manager had started to take on more risk, increased her trading frequency or began to buy stocks that didn’t meet her stated investment strategy.

Imagine how much improved your manager selection would be if you received alerts whenever your manager’s behavior changed beyond a certain level. Finding out about it six-months later is, to say the least, not helpful. This kind of trend information is only possible if money managers open up to fully transparent real-time access.

In investing, it doesn’t happen as often as it should. As a CEO now and a long-time venture capitalist at Benchmark Capital in Silicon Valley, I’ve seen real-time software, information, analytics, reporting and budgeting revolutionize industries and create lasting efficiencies for adopters.

Real-time technology is within everyone’s reach. The investment industry shouldn’t stand alone in granting this sort of access to a class of “haves” — endowments, hedge funds and ultra-wealthy clients – while denying it to the “have-nots.”

Mention real-time portfolio access to most money managers and the hair on the back of their necks stands on end. There’s nothing that breeds fear into them like the prospect of their investors focusing on short-term results. But getting a minute-by-minute view into what your money managers are doing doesn’t necessarily mean you aren’t a long-term investor.

I understand a major impediment to RIAs asking their money managers for real-time access is the fear that they too will be subject to the same level of scrutiny. Doesn’t that beg the question, if you can’t withstand scrutiny, why do you deserve to be entrusted with your clients’ assets?

Eric Schmidt: It’s how you apply your judgment to all the data to find the signal in the noise that will differentiate you in your career.
Eric Schmidt: It’s how you apply
your judgment to all the data
to find the signal in the
noise that will differentiate you in
your career.

Accessing real-time information isn’t simply about a data dump. It’s about obtaining the right data. Today’s technology provides us with the tools to mine more information than ever, but as we can all attest, simply having more information isn’t necessarily helpful.

My teaching partner at Stanford University Graduate School of Business, Eric Schmidt, CEO of Google, likes to tell our students that it’s how you apply your judgment to all the data to find the signal in the noise that will differentiate you in your career. Unfortunately we spend so much time inundated with data that we don’t seem to have enough time to find the 80/20. (See: You already know the 80/20 rule. Here’s how you can apply it not only to your clients but your operations.).

I’d love to tell you that there is a solution on the horizon to finding the signal in the noise, but, as far as I know, there isn’t. We all need to make time to try to determine what’s important. Sticking our heads in the sand and ignoring the data available (or should be available) to us is not going to solve the problem.

At Benchmark Capital, we were highly influenced by a book written by Jim Collins called “Built to Last.” In his book, Collins analyzed 18 companies that endured as market leaders over long periods of time to determine what led to their success. One of the key ingredients was their willingness to experiment. As a result, the Benchmark partners embraced experimentation, which led to much of their success.

RIAs should take heed from this example. Watch for new entrants who develop tools or methodologies that claim to leverage new kinds of data. That doesn’t mean blindly follow every new idea, but take the time to think if it could make sense and if it does, try experimenting with it with a small amount of capital. Only through innovation can you win. As Ricky Bobby said in Talledega Nights “if you ain’t first, you’re last!”

Andy Rachleff is CEO of Wealthfront, an online investing platform that qualifies and vets registered money managers and recommends them to individual investors.

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Mentioned in this article:

Portfolio Management System
Top Executive: Andy Rachleff

Andy Rachleff

Andy Rachleff

February 5, 2011 — 6:08 PM

Thank you for the response Stephanie. One of our money money managers told us “the good have nothing to fear” when it comes to transparency. We couldn’t agree more. Our elite group of money managers distinguish themselves by selecting investments that others overlook and earning outstanding returns as a result. They understand the value they bring is a consistent track record of beating the market, not in obfuscating how they actually do it.

Andy Rachleff
CEO, Wealthfront

Stephanie Sammons

Stephanie Sammons

January 27, 2011 — 3:56 PM

Andy, thanks for this article and viewpoint. I am very familiar with http://www.wealthfront.com and http://www.covestor.com and I think it’s only a matter of time before transparency is no longer avoidable. One of the primary ways that money managers and financial advisors have relied upon for closing new business is their “secret sauce” investment strategy. There are very strong opinions about opening up the real-time portfolio closets due to the fear of losing this “imaginary” edge. Ironically though it is not simply the investment methodology that builds trust, it’s the consistency of results, communication, and follow through. There is a desperate need to regain trust in the industry and transparency could get us there! However, there is a lot of work to do in convincing money managers and advisors that this could be good for everyone.

Stephanie Sammons
CEO of http://www.wiredadvisor.com

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