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11 Nov 13:45

Teaching the Middle Class to Invest Like the One Percent

by Callie Enlow
Illustration by Addison Eaton

Income inequality is by now a term most Americans know well. From French economist Thomas Piketty’s surprise bestseller tackling the topic, to the new leader of the Fed, Janet Yellen, confessing that the trend “greatly concerns” her, to a much-shared study indicating the U.S. is closer to an oligarchy than democracy, 2014 was the year that the widening gap between the wealthiest and poorest families in America went mainstream.

As Piketty points out, there’s a historic disparity between making money from investments and making money from your day job that greatly favors the former. While the U.S. government will likely engage in political battles to move the needle for day-jobbers through initiatives like minimum wage hikes or tax breaks for the middle class, there’s renewed interest in making the other side of the equation, investing, more accessible to the 99 percent.

That’s where Aspiration, a financial services company that debuted today, comes in. Founded by Democrat wunderkind turned federal fraud prosecutor and business consultant Andrei Cherny, and advised by billionaire internet entrepreneur Jeff Skoll, Aspiration is already making waves with a business model that not only allows clients to choose their own fee (or none at all) for the services the firm provides, but one that donates 10 percent of its revenue to microloans for struggling Americans.

“Millennials are used to wanting to do business with companies that aren't just about profit, but are about a larger purpose as well,” said Cherny. “That is the way they shop, that is the way people exercise their decisions in all other aspects of their lives, and that hasn't been true in investment options.” While he acknowledges that socially responsible mutual funds have existed within major financial institutions for a long time now, he also points out that “nobody has really built a retail financial company with those kinds of values.”

At the heart of Aspiration’s online-based service is its commitment to making complex investment portfolio options more accessible to the masses. The first product, Aspiration’s flagship fund, relies on liquid alternatives. These funds, designed to hedge against the stock market by investing in nontraditional assets using sophisticated trading strategies, are all the rage on Wall Street right now, but, according to CNN Money, the average minimum investment is $6,000. Aspiration’s is $500.

To hear it from Cherny, Wall Street never made these types of tools available to the middle-class investor because it simply didn’t have to. “It's easier to find one person with $100 million than a lot of people with $1,000 or $10,000, so just from a business standpoint, they haven't had the need to do so,” he said.

Andrei Cherny

But other investors and finance professionals consulted on this matter said there are also questions of risk and regulation to consider. While Aspiration’s flagship fund was created to be less volatile than the stock market on average, the Securities and Exchange Commission considers liquid alternatives to be part of its “heightened risk” examination priorities this year. Hedge funds, closely related to liquid alternatives, may seem reserved for the elite as a matter of smart business strategy, but they are actually required by law to only do business with “accredited investors”—meaning a minimum net worth of $1 million or a minimum annual income of $200,000 for each of the past two years. This regulation came about after the Depression not so much as a way to protect the wealthy from sharing the secrets to their financial success, but to keep regular investors, the type Aspiration hopes to attract, from losing their shirts.

Aspiration addresses this risk by capping the initial investment for their debut fund at $100,000. But the company also aims to empower investors to protect themselves via an educational component on the site. 

“So much of what you see from the financial industry is charts and graphs and white papers,” said Cherny. “For some people, that’s great and that’s how they learn, but, for a lot of people, that is not only not how they learn but [it] is counterproductive and feels like math homework. People run in terror.” Perhaps that’s why a 2012 SEC report found that “studies show consistently that American investors lack basic financial literacy,” and that the problem is even worse among women and minorities, two groups also susceptible to poverty at greater rates. Another study showed that most Americans turn to their family for financial knowledge, giving those who come from strong investing backgrounds a significant leg-up when they decide to enter the market.

Aspiration aims to not only provide that necessary financial education, but hopes to make it more open and engaging. While most investment firms offer dry reports and often perplexing diagrams tracking an investment’s progress, Aspiration explains the basic premise behind its investment strategy in cute animated videos and Choose Your Own Adventure-type games. While this approach may induce groaning in seasoned investors, the vast majority of Americans who don’t understand basic investing principals (like compound interest and inflation) might rejoice.

“I've been trading from a pretty young age, in college,” said Aspiration’s vice president of product, Matthew Lee. “Seeing both friends and family around me, a lot of them are just financially illiterate. They have the desire and motivation to learn, but it was difficult for them because the financial language is cloaked in a lot of acronyms and hard-to-understand terms.” Aspiration seeks to create a friendlier approach to financial literacy based on narrative storytelling and gamification as a way to recruit a customer base from everyday Americans put off by traditional financial literature.

Cherny said that the educational components are “a big part of what we do and will always be a through-line in our approach.” To ensure their videos and games make sense and are engaging, Aspiration relies on extensive user feedback, including that of their lead designer Jess Brown, who is the first to admit that he has little background in the financial world. “For me, it was teaching myself through this material as well and feeling that I have a grasp enough to make these types of investments for myself,” he said of his design process. He helped come up with analogies like thinking of a diverse investment portfolio as a well-balanced diet. Now, Lee claims that even Brown’s young children can sit through the animated cartoons available on the site.

While providing explanations of financial mechanisms so simple a child could understand them has no correlation to a firm’s return on investment, it may help spark what Aspiration calls “a revolution” in wary, underserved potential investors, like young professionals, people from economically disadvantaged backgrounds, and women. It also serves Aspiration’s mission to create trust among its clients. “We were really trying to make it feel that this is not just the latest startup coming out of Silicon Valley,” said Brown. “These are real people that are really conscious of wanting to help better everybody's financial endeavors.”

For Cherny, a policy wonk at heart, this all goes back to creating a solution for the economic inequality so startlingly defined by Piketty. “What I didn't necessarily like about…what Piketty was arguing was that because of this mismatch of some people making their money off of investments and others off of labor, that's always going to be the case. What we're saying is that if you take that as being true, as opposed to being pessimistic and saying there's nothing we can do about it, the answer is give more investment opportunities to middle-class people so they can enjoy that rise up the income ladder, and wealth ladder as well.”

12 Jul 19:00

Google's New Account History Page Helps Further Control Your Privacy

by Dave Greenbaum

Google's New Account History Page Helps Further Control Your Privacy

As you probably know, Google tracks quite a bit of what you do online. Much of this is to improve your search results or to assist with Google Now. Google's updated Account History page now allows you to "pause" or delete Google's historical information about you.

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