A New Threat to the Financial Industry's Status Quo

This story was updated 10:15 a.m. May 10, 2012 to include a response from money-manager Fidelity regarding hidden fees.

The following commentary is from an investment professional with Clear Harbor Asset Management who is a participant in TheStreet's expert contributor program.

NEW YORK ( TheStreet) -- SigFig, a new online service for retail investors, appears to make real strides toward bringing a level of transparency to the financial industry that has been sorely lacking.
SigFig's founders aim to turn trickle of investors choosing independent, lower-cost advisers into a flood.

The rise of the Internet has been a boon for consumers in so many ways, but when it comes to the financial industry, the fruits of the digital revolution have been slow to ripen. There is still little pricing transparency in the industry, and people with limited financial acumen often struggle to find credible information they can rely on to make intelligent decisions about managing their money.

The founders of SigFig aim to change that.

"Wall Street has done a very good job of obscuring information and leaving people in the dark about what they're really getting and what they're actually paying to get it," says Mike Sha, co-founder and CEO of SigFig. "Most people don't have access to very good investment advice, and they're targets for some of the firms out there that are peddling self-serving information and not offering a good value proposition."

Such firms should be worried about SigFig. It's a free service that can sync up securely with your investment accounts -- including 401(k), IRA, brokerage and investment adviser accounts -- so you can track your entire portfolio in one place. Once you have signed up and entered the login information for your accounts on the SigFig website, the service analyzes your portfolio and transactions using a trove of information and third-party data from sources such as Morningstar ( MORN) and Lipper. It then makes judgments about how your investments are performing and what kind of deals you are getting from the institutions you are patronizing.

Based on those judgments, SigFig makes recommendations on changes you can make to save money, get better service and achieve higher returns in short order. It will also monitor your accounts over time and send you alerts when concerns arise or if you need help with things such as tax-loss harvesting.

It's unclear to me how well SigFig's service really works, but I was impressed by a demonstration of the site's capabilities. It's definitely on the right track in terms of addressing a need consumers have that digital technology can and should be tackling. Whether it can execute effectively on the concept remains to be seen.

There are already plenty of sites that provide financial news and investment advice and can track an investment portfolio and analyze performance and fundamentals. Also, there are sites such as Mint.com that pull your disparate accounts together into one personal finance dashboard for planning purposes, but SigFig is new in its attempt to pull back the veil on what you're being charged for specific investment products and how those products stack up with the alternatives.

"Any financial tool that is safe and can provide individual investors with more access, transparency and objective guidance is worth checking out -- especially these days," says Farnoosh Torabi, a personal finance expert and the host of Financially Fit, a show on Yahoo! Finance.

Sha says SigFig's Web site is as secure as any major financial institution's, and the company keeps user information private. Meanwhile, he says the site usually has immediate recommendations that can help a user.

"There tends to be a lot of low-hanging fruit in terms of simple changes people can make to improve their portfolio," says Sha, adding that retail investors are often not well served by major brokerages such as Merrill Lynch, which is part of Bank of America ( BAC). Representatives for Bank of America/Merrill Lynch declined to comment.

He notes that more than half of SigFig's 300,000 users that are clients of the top 20 brokerage firms pay more than $25 per transaction in their accounts, which can add up to big money over the course of a year. He also says about a quarter of SigFig's users with investment advisers are found to be paying exorbitant fees for poor performance, and it's not uncommon to find that a broker has steered a user into an overly expensive product when they could be getting the same investment exposure for less.

Then there are the hidden fees, such as late settlement fees and so forth, of which most people are completely oblivious. It turns out Fidelity, one of the largest money management firms in the world, actually has more such fees than any other financial institution on the SigFig platform, according to Sha.

Fidelity spokesman Stephen Austin disputed this claim.

"The few fees that we do charge are in line with common industry practices and fully disclosed online for every investor to see," said Austin. "Our offering is highly competitive when compared with other major online brokers."

SigFig, which is short for Significant Figures, comes from the same team that produced the Web site Wikinvest, a portfolio-tracking and information tool. Including the users migrated over from Wikinvest, SigFig is tracking more than $30 billion worth of assets, and the company is looking to hire talent at its headquarters in San Francisco.

Sha and his co-founder, Parker Conrad, were roommates at Harvard University, where they were day-trading online during the Nasdaq bubble of the late 1990's. After school, Sha went to work for Amazon ( AMZN) while Conrad joined Amgen ( AMGN), but they later partnered to pursue creating a service that could reshape the financial industry for the benefit of retail investors. Now, their largest backer is the venture capital firm DCM, and they're advised by the likes of Jason Krikorian, co-founder of Sling Media, and Owen Van Natta, formerly a top executive at Zynga ( ZNGA).

SigFig makes money by maintaining a referral database of investment advisers who have its stamp of approval for offering quality services for a fair price. If a SigFig user becomes a client of one of the firms in the database, it shares in the resulting fees. The company also collects referral fees for other products, and it's in talks with news organizations such as CNN Money about licensing its online portfolio tracking technology.

"We tend to recommend independent RIAs to people because they have to put your interests first," Conrad says. "That's why you're seeing this trickle of assets migrating away from wirehouses to RIAs. We think we can turn that trickle into a flood."

Follow me on Twitter @NatWorden

Disclosure: Worden works for an independent RIA. He and/or his firm hold positions in AMZN, AMGN and BAC but not in any other stocks mentioned in this article.

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