Wednesday, June 07, 2006

Automating The Financial Planner?

Everyone is now aware of the success of the online brokers. They took the traditional transactional broker, automated him/her which resulted in lower costs and faster executions. Recently I was reminded of how widespread they have gotten when I was pitching a certain someone with $50 million in the market, by the end of my pitch he already bought the idea through his ameritrade account.
The one thing most of these online brokers don't do is financial planning, except for ETRADE. While the others automated the broker, ETRADE automated the financial planner. The brokerage part of the platform allows the user to see how much return they can expect for risk, stress testing (how would the portfolio act on black monday 1987 or 9/11) and performance evaluation with benchmarking. In addition they created a one stop shop for banking, brokerage, credit & lending. This allows them to not only sell on commission but they can also integrate it with the brokerage, so the user can plan out their finances from an investing, banking, spending and borrowing perspective. This allows ETRADE to sell more products such as credit cards and mortgages, and because of the nature of financial planning probably allows them to gather more assets per customer.
Actions are louder then words, and the number are saying the approach is working. Over the past 5 years EPS growth averaged 76% vs 21% for the industry, and valuation wise its cheap trading at 15x this years earnings vs 17x for the industry and 13x next years vs 15x for the industry.
ETRADE may appeal to the retiring baby boomers, but it may really appeal to the younger workforce coming on to replace them, for who it may not make sense to use a traditional financial planner.

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