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Robo Rise Barred By High Client Acquisition Cost

Robo-advisors need clients to operate and the cost of acquiring clients in financial services is high. To us, this is the elephant in the robo-advisor room that is seldom discussed – which we believe is a strategic failure of the highest order. It is an overriding concern that hangs over all other discussions about robo-advisors. Acquisition costs include the costs of initially finding a prospect and then converting those prospects into clients, with the inevitable attrition rate that those conversions incur. When total costs are compared to clients gained, the results can be surprisingly high. Lucian Camp calculates the cost of acquiring a client in the UK to be around £200 (US$312). This cost is beyond the means of many advisory firms, which is why they grow rather slowly – largely through word of mouth referral. In the past, they might have relied on product manufacturers and distributors to provide them with marketing support. Under new regulations in the UK, such supports are now largely no longer possible, but they continue to thrive in the US marketplace. In a world where former specialties have become commoditized, being able to make a financial product or service no longer makes you special as it once did. Where, in the past, you may have been able to extract an economic rent because you occupied a position of advantage, market forces have now equalized you. Today, the ability (knowledge) and capacity (cash flow) to quickly market financial products to scale is what separates successful financial services businesses from the ‘also-rans’. It does not matter if you arrive at the marketplace with a better mousetrap if that trap is hidden where the mice cannot find it. Cheese – in the form of marketing, advertising and promotion – will help to attract them. But cheese isn’t cheap. We return, once again, to our initial caution – robo-advisors are very good at servicing customers, but do nothing to attract customers. Putting a robo-adviser to work effectively requires considerable investment in marketing and promotions, with no guarantee of success. Vitamins and supplements are equally generic. Yet, a family business in Australia figured out how to create a brand that made generic inputs ‘special’. In late 2015, a Chinese firm acquired the vitamin and supplement company, Swisse, for A$1.5 billion (US$1.05 billion). Swisse is a marketing machine – it is constantly in the news, through its sponsorship of high-profile ambassadors and it spends a lot of money on advertising. It is rumored that its annual marketing budget is A$50 million (US$35 million) when the cost of the raw materials for all of the products it makes is less than A$5 million (US$3.5 million). Vitamin C is not special – being part of the brand image and lifestyle Swisse promotes is special. More than US$1 billion worth of special! Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: For FA audience/ Gil Weinreich

5 Economic Charts Help Investors Understand Trump And Sanders

Investors should be capable of asking a very simple question: If the domestic economy is performing admirably, why are Americans fed up with established politicians on both sides of the aisle? On the Democrat side, a 74-year old white male who admires socialism has inspired more voters than the prospect of the first female president in the country’s history. In the Republican corner, an unconventional billionaire and self-proclaimed wave maker has promised to restore America to greatness – he is trouncing competition on the nationalistic notion that America has lost its five-star status. Along these lines, Real Clear Politics reports that two-thirds (66%) of the electorate believe the country is on the wrong track. Only 28% believe the country is moving in the right direction. It follows that the anti-establishment allure of socialism and nationalism tends to thrive when a country’s economy is frail. Of course, many insist that the U.S. economy is in fine shape with admirable job gains, a vibrant consumer and a healthy business segment. The problem with the assertion? The last 15 years of data portray a very different picture. For example, since 2000, fewer and fewer Americans enjoy home ownership – therefore, fewer and fewer benefited from surging real estate prices on ever-decreasing borrowing costs. Similarly, fewer Americans in the prime age demographic (25-54) are participating in the labor force. For all the “pleasant chatter” about low unemployment, millions and millions of working-aged citizens are no longer being counted or compensated. Along these lines, here are five economic charts that investors might want to consider when deciding upon their asset allocation in a contentious election year: 1. American Households Owe… Big Time . Total household debt hit $12.1 trillion in the fourth quarter of 2015. That’s only a fraction below the all-time record of $12.7 trillion reached in the third quarter of 2008. Between the first quarter of 2003 and the third quarter of 2008, debt grew at an astonishing pace of roughly 74%. That bears repeating. Total household debt rocketed 74% in just five-and-a-half years. Since the debt surge occurred at a time when the Federal Reserve was raising its overnight lending rate – since it occurred when the 30-year mortgage remained in a relatively stable range of 5.75%-6.75% – debt servicing became increasingly difficult. Debt servicing became near impossible when wages did not rise as quickly and when home prices stopped appreciating. It killed the “cash-out refi” game. And the Great Recession wasn’t far behind. One would think that a lesson had been learned about the insidious nature of debt. And yet, instead of deleveraging to reduce overall debt obligations, households have taken the Federal Reserve’s ultra-low interest rate bait. Can households service their debts better when a 30-year mortgage is closer to 4% than when its closer to 6%? All things being equal… yes. Sadly, the capacity to service mortgages and other debts is not merely a function of current rates, but also a function of future rates, household income and cost of living adjustments. It follows that when household income growth only amounts to 26% since 2003 – when real income adjusted for inflation actually declines (e.g., soaring medical costs, rising food prices, etc.) – the 66% surge in total debt since 2003 takes on unsavory dimensions. Why? The Federal Reserve may once again create circumstances where borrowing costs either rise or remain range-bound at a time when inflation-adjusted wages stagnate and home prices cease to climb. Once again, households would struggle to service their debts. 2. Americans Earn Less Than They Did In 2000 . Imagine working your tail off for the last 15 years. Your household income on a nominal basis is higher than it was back then, but your money does not buy what it did at the start of the 21st century. Are you going to feel that the country is on the right path? Are you going to believe those who trumpet 2% annualized gross domestic product (NYSE: GDP )? On an inflation-adjusted basis, middle class households today are taking home somewhere in the neighborhood of $56,746 per year. That is less than it was at the inception of the financial collapse ($57,798). Even more disturbing? Households are bringing home less real income than they did after the recession in 2001-2002 ($57,905). No growth in household income since 2000 and a whole lot of growth in household debt. Thank the powers that be for ultra-low interest rates, right? 3. Millions Priced Out Of The Home Ownership Dream . Twenty years ago, extraordinary stock market gains and genuine labor force participation growth in high quality, high paying jobs made Americans feel more wealthy. Households began trading up, while first time home-buyers flush with cash entered the real estate market. There was more. In 1995, government regulators created new rules for determining whether a bank was meeting the standards of the Community Reinvestment Act (NASDAQ: CRA ). Banks now had to prove that they were making enough loans to low- and moderate-income borrowers. Suddenly, home-ownership rates began skyrocketing. There was a minor flattening out period during the tech wreck of 2000 and the 2001-2002 recession. However, with the Fed slashing overnight lending rates to 50-year lows, the precipitous drops in mortgage rates, as well as the existence of “no documentation”/”negative amortization” loans, home-ownership rates kept right on ascending. Click to enlarge Real estate sales peaked near 2005, prices peaked by the end of 2006. And the “fit hit the ceiling fan” by 2007. Since June of 2009, however, the U.S. economy has been expanding. One might have expected home-ownership rates to rise or level out. Instead, fewer Americans own homes (on a percentage basis), whether it is attributable to stagnant inflation-adjusted income or higher property prices or unfavorable debt-to-income ratios. Keep in mind, this trend is happening alongside record-low mortgage rates. It does not require a leap of faith to suggest that millions of additional renters contribute to economic angst and a dissatisfied electorate. 4. Employment Growth Is Slower Than Population Growth . U-6 Unemployment at 9.9% is far higher than the 8.5% U-6 Unemployment at the onset of the Great Recession in November of 2007 – the 9.9% unemployment rate is actually on par with how Americans felt AFTER the 2001-2002 recession, when U-6 lingered around 10%. In essence, the jobs picture has only recovered to a place that is similar to recessionary times (10%), as opposed to non-recessionary times (8.0%-8.5%). On the one hand, there’s reason to be pleased with the progress of bringing U-6 Unemployment back from 17% at the worst of the Great Recession. On the surface, then, progress is certainly progress. The difficulty in declaring victory in the jobs arena is the fact that nearly one out of five 25-54 year-olds who are actively looking for work remain unemployed. Specifically, we have an 81% participation rate in the key 25-54 demographic. This participation rate is far more dismal than it was during the 2001-2002 recession – it is not even as strong as the 83%-83.5% participation during the Great Recession. In sum, payroll growth that averages 200,000 per month can pull down an unemployment rate. Yet it is insufficient with respect to a population that is growing at a faster clip. That is, companies hire only enough to keep up with modest demand whereas discouraged workers in the labor force are stuck as “extras” in the growth of the population. They’re missing, they are not counted. Can you blame Americans for feeling that there aren’t enough job opportunities for them? 5. The Government’s Debt Is Our Burden . The national debt recently surpassed $19 trillion. Implicitly, Americans understand that there is something very wrong with the number. If it was $6 trillion at the start of the century, and it was $9 trillion near the end of 2007 when the Great Recession began, then how can the country’s economy be humming if it needed $10 trillion of stimulus to get it humming? According to U.S. Debt Clock at USdebtclock.org , the debt each citizen owes is close to $59,000. The average household – not the average person – brings in approximately $57,000. Try to imagine having a credit card balance that is larger than your income stream. (And that’s for a family of 1!) A four-person household might bring in $57,000, yet owe $236,000. Crazy, right? Well, some estimates may be a little more friendly by removing the Federal Reserve’s ownership of U.S. Treasuries from the equation. The way the graphic below presents it, each child born today has an obligation of $42,759. Straight Outta Nutsville. Naturally, you’re free to believe that the federal debt simply does not matter because low interest rates make it possible for the Federal government to service its debt obligations. And you’re free to decide that America just needs to keep paying the interest – we don’t actually have to pay the debt back in its entirety. In fact, worse case scenario, the Federal government can just print money like the Federal Reserve did with its electronic credits in quantitative easing (QE). Fair enough. Still, there comes a point when rates cannot truly be lowered much further. Even negative interest rates would have a lower bound. The implication? Lower percentages of participation in the labor force, record debt levels at the household level as well as the federal level, stagnant wages and declining home-ownership are tell-tale signs of economic trouble. Americans feel it… that’s why many have chosen to support Bernie Sanders or Donald Trump. The stock market has been feeling it too. On the one hand, investors have been breathing a sigh of relief that the S&P 500 SPDR Trust (NYSEARCA: SPY ) has come back out of correction territory. How bad can things really be if SPY is a stone’s throw from record highs? Yet most investors recognize that a pragmatic fear of higher borrowing costs, a realistic concern about the potentially toxic debts of commodity companies, a lack of wage growth for consumers and the potential for the world economy to drag on the domestic scene have combined to create volatile price swings. What’s more, these things provide perspective on the popularity of political outsiders like Sanders and Trump. Disclosure : Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.