Is active management the best way to build a robo advisor business?
CLAYTON GARDNER: Interestingly, some passive robos have tried to launch active-type products, which generated a lot of customer backlash. For many, it wasn't necessarily what they signed up for when they started. I think it's important to be honest as a company about what your mission is, about which customer you are serving, and which particular investment products you provide. I think for us, we're hybrid in the sense that we're building a more active way for folks to participate and invest without having to make solutions themselves. We're a little bit active, but we're a little bit passive in that regard.
Titan's investing app has been described as, “built as a hedge fund for the average millennial investor.” Is that a description that you embrace?
To be very explicit, we are not a hedge fund. We’re trying to open the idea of investing in managed portfolios. Some of those portfolios may be managed by software and some may be managed by humans. The idea of having another party managing a portfolio for you is something that is not readily accessible to most folks. And so that's a really core focus. At the end of the day, we began building Titan for ourselves to solve a problem that we personally faced. I'm 28 years old. And my co-founders are 28 and 30. We’re mid-career professional millennials. And that's certainly been our biggest source of early clients.
How would you describe millennials as customers?
There's no question, millennials are digital natives. In terms of financial literacy, I completely agree that there is massive room for improvement. I would characterize most millennials as not being well-served financially as they should have been. I can speak for myself. No one taught me to do taxes when I was in high school. No one taught me how to manage my investments. And I was someone who ultimately worked for large Wall Street firms. Millennials certainly have to take ownership of wanting to learn, but I think there is a clear need for players to better serve the different types of millennials. They're not one-size-fits-all. [You have to] take stock of your core client base. I think it's just really important to understand where they fall on the financial literacy spectrum and then just be really honest and transparent about how you're going to fit into their lives.
Titan has been around for less than a year, but there are returns on your site that date back to 2004.
Let me clarify. In the disclaimers on our website, we make it clear that the returns prior to our launch are backtested returns for the hypothetical portfolio. The software investment strategy could have technically been implemented as early as 2004. That's the furthest back that the data we used for our model was available. What we show is a hypothetical portfolio; had Titan launched in 2004, how that portfolio would perform. It is illustrative. They're not actual results. The actual results are only relevant since we launched earlier this year in about February. We made sure we're incredibly transparent with prospective clients. We're an SEC-registered investment advisor, so it is incredibly important that we make it very clear and we believe it is.
How will you keep your costs low?
In terms of Titan employees, it's just three of us. We're built essentially like a robo advisor. We actually do trades on behalf of our clients. We hold their assets at a third-party custodian. And we use a mobile app to communicate and engage. So the cost structure is quite lean and our revenue model is very simple. We charge a 1% fee. Our 1% is a wrap fee. So that's an all-in wrap fee. So there is no charge for a typical user to sign up, fund an account, get invested and make deposits and withdrawals. And ultimately if they choose to leave Titan, there are no additional fees. Asset management is a wonderful business in terms of how things can scale. But the goal is making sure that the value confidence doesn't get diluted at scale.
How do you win clients with the 1% fee?
The core need and desire of our client is they want to actively participate in the financial markets beyond passive ETFs but they have no idea how to go about doing that. That translates to either not understanding what securities provide, how to have and maintain an investment process, where to go, what kinds of securities, etcetera. The core problem we're solving for our clients is giving them a way to actively participate in the financial markets through a managed solution. So it's both the access to the investment product and then the experience or educational components after they are invested. I think different levels of passive versus active products are right for different types of folks. It totally depends on your own personal financial profile.
Today, there are many hundreds of thousands of mutual funds out there which are technically managed solutions. And there are mutual fund managers. Unfortunately, many of them were built decades ago and so the user experience of finding and investing in a mutual fund feels very broken.
Can all of Wall Street be disintermediated?
I wouldn't say disintermediated is the right word. I think there are certain parts that folks are trying to disintermediate. I think what everyone in the industry could probably agree is that there are many aspects that can be modernized. [Proponents of] disintermediation see that as a zero-sum game, like some new tech startups will win and the incumbents will lose. What we hope to do is actually be part of an added ecosystem, in the sense that we can help not only build a new way for millennials to invest, but also hopefully encourage some incumbents to retrofit their business models and their technology stacks that do well, to engage with their clients this way. But that's just bringing everyone up to date with the times, versus creating a sort of negative externality or disintermediation.
