Interview with Founders of Investment Portfolio Analysis App–Draft

Recently I had the chance to speak with Brad Lawler and Jason St. Peter, founders of DraftApp.com. This app enables investors to evaluate the asset allocation of their portfolio and compare it to other portfolios of like-minded investors. Think of it as crowdsourcing your investment portfolio analysis.

A New Way to Analyze Your Investment Portfolio

As described by the company, “The app allows users to pull all their investment accounts into one single location and compare performance, fees and asset allocation against real portfolios from other users.” Draft focuses on asset allocations using low cost investment options. As a result, even those investors with advisors can benefit form the app. As you’ll hear in the interview, some investors have used the app to spark conversations with their advisors about excessive fees.

Resources mentioned in this episode:

Transcript of the Interview

Rob: Brad and Jason, welcome to the show.

Jason: Yeah, thanks for having us, Rob. We’re excited to be on.

Rob: I am excited to have you on. I like new technology and I like people that start new companies, maybe in part because sometimes I don’t think I have the courage to do it. But that’s exactly what you guys have done. Obviously, I want to hear about Draft, your new investing app, but before we get to that why don’t you guys tell us a little bit about who you are. Brad, you want to go first?

Brad: Sure. My background is actually as a financial advisor. I started my career off working with a couple of other advisors on a team at Morgan Stanley in Chicago. If you show success as a financial advisor you start getting a lot of calls from other financial advisor companies and institutions, so we were recruited to join UBS’s ultra high net worth office which is where I ended my financial advisor career. Then I moved over to the technology side and started working for a company called Zephr which does performance and risk analysis. So if you’ve ever sat down with an advisor and they’ve shown you a report that’s more than a couple of pages in a big book, that report was most likely created with the Zephr software. I started to realize that the software and the technology advancements that were happening were in the wrong hands. They were only being used by the investment professionals. And often times not even by the retail investment professionals but the larger investment groups like pension consultants and things like that and that there was a opportunity to put that technology in a simplified version into the hands of investors. Before going in that direction, I decided to go back to school and do a Master’s program at the University of Texas. It was an insider program called, MSTC (Masters of Science Technology and Commercialization) which is where I met Jason, who has a very different background, but one I think definitely compliments my background.

Rob: Okay. Well, before we get to Jason, I just have to ask you… You gave us a lot of information there and you mentioned ultra high net worth. That was the group you were in. So what exactly— what does one have to do to qualify for ultra high net worth? Just give us all a goal to shoot for.

Brad: Yeah. Well, at UBS they defined ultra high net worth as focusing on clients that had $10 million of investable assets, and up.

Rob: Okay. Ten million. So that’s what we’ll all shoot for. I’m curious, if someone were to use their services—someone with $10 million or more in investable assets, what kind of fees would they be paying?

Brad: When you start to have that ultra high net worth, you really enter a different group of investors where you start to have access to different types of investment products like separately managed accounts instead of mutual funds. And you start to have enough money and enough assets to have control over the fees at your bank to be able to negotiate those down. So our clients were typically paying 60 basis points to a percent in fees—those who had that type of net worth.

Rob: You see, if I had $10 million to invest, I’d just keep it Vanguard Index Funds. But that’s another topic— and I’d pay 5 basis points. Okay. Jason. Tell us about your background.

Jason: Yeah, well, prior to Draft I spent the last two years running the Dell for Entrepreneur’s Program. So, people who are familiar with Dell the technology company here in Austin, Texas. We started a program there to help get entrepreneur’s and start-ups off the ground using Dell technology. That’s really what lit my entrepreneurial spirit. Then I joined the New Venture Creation program at the University of Texas. But I spent a lot of time working with venture capitalists and start-up communities learning what it really took to get a new venture off the ground. And, I was looking for a great partner with a great idea that had a large market, and Brad and I hit it off really well. We spent about six months in the program doing a lot of market validation as a school project. So that helped de-risk our decisions to leave these really nice paying jobs to get paid nothing for a little while.

Rob: So when did you guys leave those nice paying jobs and form Draft? Was that this year or earlier?

Jason: Actually, I think it was the week after we graduated. So it’s just over a year ago.

Rob: Okay. I want to get into Draft, but before I do, Jason, since you worked with Dell, I’m in the market to buy a PC and I’m kind of ashamed to admit it since everything I have is Mac but I may need a PC. Does Dell make the best PC—

Jason: Stay away from that right now. Just like we don’t make recommendations of funds to buy, I’m not going to make a recommendation on the right piece of hardware.

Rob: Okay, that doesn’t sound good for Dell. Tell us about Draft. What is it?

A New Way to Analyze Your InvestmentsBrad: Well, kind of going back to what we were talking about before that the consumer, the investor really needed to have these types of tools in their hands. But before we could put it in their hands we had to make it simple because, obviously, investing today has become so complex and so difficult to understand things. Part of that simplicity comes with making it easy to get started. Draft is and investment analysis tool that starts with allowing you to connect directly to your investment accounts. The best way to think about this is like what mint.com did with your personal finance in allowing you to connect directly to your bank accounts wherever they may be. We used the same data aggregator that mint did originally. It’s a company called, Yodlee that has all the security and direct connections in place that allow our users to connect directly to their bank accounts or investment accounts, wherever they may be. Unlike mint.com, we focus more on the investment side of things instead of the cash coming in and out. So we can see inside an investment account to see that you have mutual funds and ETFs. But the feed we get from those groups is pretty basic so we connect to a Morningstar data base that has all the product information about those investments. We keep both of those up-to-date on a daily basis to help people understand what’s actually going on inside of their investment accounts (wherever they may be) and a holistic single location across performance, fees and asset allocation.

Jason: So Rob, the first thing you can do is, you can stop using spreadsheets to keep track of your investments. Everything updated automatically everyday for you. So that’s a big benefit for a lot of users when they first come on.

Rob: Okay. So this is a smart phone app, right?

Brad: There will be a smart phone app available in the app store in 2016 but we started with a web-app so users could access it from any device like a Mac, a Dell, an Android or an iPhone.

Rob: Is it free to sign up?

Jason: Yeah, it’s free.

Rob: They can then connect their accounts whether they’re at Vanguard, Schwab or Scottrade. Could be a retirement account, a taxable account… And you guys just kind of suck in all that data in terms of what they’re invested in and how much. Do I have it so far?

Brad: Yeah.

Jason: That’s step one, yep.

Rob: And then once they do that they can see their account changes as the market opens each day. But I take it, it also shows them their asset allocation across all of their accounts?

Brad: It does. And we give the user the ability to toggle on and off the different accounts. So, if they have all of their accounts toggled on we can show them how to diversify it across all the different categories that Morningstar covers. So, equity, fixed income in cash, all large-cap, mid-cap, small-cap, geographic regions and even down to the sector level.

Jason: Rob, one of the things I’ve heard you mention before is whether or not you should own the same type of fund in multiple accounts and you recommend that sometimes it does make sense if you need more exposure to certain sectors and Draft will allow you to see that pretty easily. So if you’re looking at your retirement plan and how it’s diversified across the different choices you’ve had but you know you need a little bit more in terms of say, and S&P 500 Index fund, it will actually allow you to see, combining all those accounts together, how that exposure will look.

Rob: Okay. Does Draft make any recommendations in terms of asset allocation?

Brad: Yeah. We make no recommendations. It’s more a data visualisation tool so people can finally see and understand these things for the first time. But, getting access to someone’s account and telling them something new about their investment accounts was just a necessity for what Draft really does. And it’s become a very helpful thing for a lot of people because it’s been so difficult to just see those things.

The real goal of Draft is to create a better benchmark, a better comparison tool. And it’s that comparison that allows them to understand if they need to do something different, which we refer to as, ‘opportunities’. The way that we handle that is to say, once we have all this information and can make sense of the investment portfolio, we use the percent equity in someone’s holistic portfolio combined with a risk-statistic, standard deviation.

And, we back-test these portfolios on what they own today and show them—this is how you’ve performed over the last five years or the last ten years inside this portfolio. And here’s the amount of risk you’ve been taking. And we use those two numbers together, equity and standard deviation to show somebody if they currently have a conservative, moderate or aggressive portfolio which is a new piece of information for a lot of users. We do this so we can create that ‘better’ comparison, that better benchmark.

So if someone learns that they have a moderate portfolio, instead of comparing their moderate portfolio against the S&P 500, which is just 500 of the biggest companies in the US which is not a great benchmark and I think it’s kind of silly that financial advisors continue to preach diversification but then compare your portfolio versus 500 big companies in the US. What we’ve done is create a better benchmark through crowd-source data.

So all the other users in our systems—even professional strategies that we’ve put into the platform go into our crowd-source model to say, “Here’s how your performance fees and asset allocation compare against the top performers inside of your category.” So then the user has new data points to see that they’ve under-performed, potentially, they’re paying more in fees or maybe they have asset allocation gaps versus that new comparison group.

Rob: Where do you get the data? I know you said you started out as a financial planner?

Brad: Right, that’s correct.

Rob: So where do you get the data to determine what would be moderate versus aggressive versus conservative?

Brad: The performance and risk analysis company I previously worked with, Zephr, has some of the smartest minds in the world when it comes to this type of thing. And we are lucky—one of those guys actually worked with Bill Sharp (that created the Sharp Ratio), Zephr was the first to create this analytic tool using return space analysis and really pioneered a lot of investment statistics that are being used by retail and institutional investment advisors out there still, today. We’re lucky enough to have two of those individuals as part of our advisory board that help us figure out what these algorithms are going to look like.

Rob: As a business, how do you make money with this? Because, to keep this going you’ve got to have revenue at some point. How are you going to make money?

Jason: The bottom line is, we make money when someone makes a better long-term financial decision. That’s what it comes down to. So, when we look at the Draft application we want people to just basically get an analysis of their holistic portfolio. And if we identify gaps in those portfolios we can work with online partners like a TD Ameritrade to help them open up a low-fee, zero commission ETFs at TD Ameritrade. Because of the data that we have too, somebody’s personal financial situation is more than just investment so we have a lot of adjacent industries that we can work with for targeted referrals for people that say they need a new life insurance policy or estate plan. So we’re forming partnerships with those companies right now, to be a big piece of our revenue model going forward.

Rob: Okay, so if you can refer someone to a TD Ameritrade or some other service, then you’ll get a referral fee.

Jason: Right. And it’s important to note too, that we never refer a product. So we’re not based on product referrals. It’s always going to be an account like a TD Ameritrade that shares in our vision of a low-fee ETF.

Rob: How do you compete? There are a number of companies that do similar things to what you’re doing. Personal Capital has a financial dashboard. Future Advisors… you know, you can plug in all your accounts and it gives you their assessment of your asset allocation and what you should invest in. SigFig has one. Blooom (with three ‘Os’) has one. I’ve interviewed folks from there and I think they’re just focused on 401ks but they have sort of a similar thing. And I’m sure there are others, those are just some that come to mind. How does Draft fit into that competitive landscape?

Brad: Well, I think that if you were to simplify the robo-advisors that are out there today, you can really put them into two different groups. There are those that are free dashboard driven, like the Personal Capital’s and the SigFig whose model is built around showing you something new about your investment portfolio that you couldn’t have figured out before and then using that information to lead you towards their online, low-fee, diversified strategies.

Then you’ve got the kind of questionnaire or ad-lib style guys like the Wealthfronts or the Betterments that understand something about you through a handful of questions and say, “It sounds like you’re a moderate investor, here’s a good low-fee, diversified moderate portfolio for you and we’ll keep this rebalanced for you.” First off, it’s a great addition to the investment industry, both of those groups. We are different in that we are free, dashboard driven. But that new information that we want to tell people? We want to take it a step further. Instead of just showing them, “Here’s what you have in this account versus this account.

And here’s what your performance has been, how your dividends have been.” That’s helpful but what’s more helpful is to compare it to something new in a new helpful benchmark. And I think that’s where Draft really stands apart from the services that are out there now, in that it educates you a little bit more about what you are today as far as being a conservative, moderate or aggressive investor. Then it gives you that new comparison data so that you can make decisions on your own through self-directed online broker strategy or even use that information to hold your financial advisor accountable.

Jason: Yeah. And Draft can always link up to a Wealthfront account too, and see how that Wealthfront account is as part of your holistic portfolio. So your Wealthfront account with your 401k. And with Wealthfront, you don’t really have a lot of control over the decisions you’re making from an investment standpoint, but you may have outside accounts that you do have control over and now you can see all those accounts together and fill those gaps with accounts you do have control over.

Rob: Right, right. And Brad, you mentioned the comparison. I want to make sure those who are listening understand it and that I understand it. When you connect your accounts and see your asset allocation, your fees, you said there was a comparison element. What exactly are you comparing your portfolio to? Other users of Draft or something else?

Brad: I think the best way of explaining this is to first start with what’s in the platform right now. There’s just over 1,000 portfolios that are in the system right now. Some of these are from early users, others have come from manually going out to Vanguard, UBS, Morgan Stanley, Wells Fargo, Betterment, Personal Capital and finding out what they recommend as a conservative, moderate and aggressive portfolios. It even includes already diversified mutual fund products like target-date funds.

And those have been entered into the system. Then, using that Morningstar data we have characteristics of those portfolios. We have their restorable returns, what they’re charging in fees for those. We have how they’re diversified across those different asset classes. And whether they’re users in our system which go into the crowd-comparison totally anonymous, by the way. Or if it’s one of these professional portfolios that we’ve manually loaded into the system, they all go through the same filter of whether it is a conservative, moderate or aggressive portfolio based on our criteria algorithm. And, of those 1,000 portfolios, 280 of those were classified as aggressive.

So then we say, of these 280 aggressive portfolios, let’s look at the top 10 percent of aggressive portfolios using their long-term performance history. Now we’re going to take those 28 portfolios and aggregate the characteristics of those portfolios. Aggregate just to come up with a single return history, an average annual fee, and to show how they’re diversified across different asset classes. If you’d like, I can tell you a little bit about what those characteristics look like?

Rob: Sure, why not. You mentioned equity and standard deviation, but yeah, why don’t you give us some insight into that.

Brad: The definition of those aggressive portfolios is based off the equity and standard aggregation. And now, in a side-by-side comparison a new user comes in and sees that they are aggressive, they can see how their historical performance, their fees and their asset allocation compared to those portfolios that have done really well. What we’ve found is that the top-performers— The more data we put into the system, the more and more it’s just confirming these things we know about top-performing portfolios over long periods of time. The historical performance of the last 10 years has been around 8.7 percent on an annualized basis. The average fees is around one half of a percent and it’s really well diversified across the different categories similar to what you’d see inside of a modern portfolio theory-type allocation.

Rob: So for those high-performing portfolios, how much of their investment is in equities versus fixed income?

Brad: It depends on if they’re conservative, moderate or aggressive.

Rob: Yeah, the aggressive.

Brad: With the aggressive it’s coming out around just over 80 percent.

Rob: Okay. I was helping someone with their retirement account and they were looking at Vanguard’s target date 2055 fund that is actually 90 percent in equities (which surprised me a little bit). How far back does the historical data go?

Brad: We take it back 10 years. We’ve built some pretty fancy additions to the system to make sure every portfolio goes back 10 years. Even if they have a mutual fund that only has a track record of two years, we use Morningstar data in kind of a clever way and say, “Okay, with only two years worth of data, what Morningstar category is this mutual fund in?” Then we go and stitch together that 8 years worth of data using the Morningstar category average.

Rob: Do you have plans to take the data back further than 10 years? Or does that get complicated?

Brad: We always can, but it’s… When you start going beyond 10 years you start having to stitch together a lot more information that’s not really true to the what the person is holding.

Rob: Right. So, when you look at the historical data, you’re sort of taking their current portfolio and assuming they’ve held it without change for 10 years?

Brad: Correct.

Rob: It’s an important assumption because as you know, so many people end up selling at the wrong time or buying the wrong time or whatever.

Brad: Absolutely. Then the performance report going forward will be more accurate based on what they buy and sell because we will have a daily access to those buys and sells.

Rob: What are your future plans for Draft?

Brad: Getting it in the hands of millions of investors. And to help them understand their investments and make better decisions using this new data. We also—

Jason: Sorry, I was going to say, to add on to it getting into the hands of millions of investors, we’re exploring different channels. How can we get this to the most people the quickest and who are the people that are going to benefit the most from these new levels of transparency that the industry struggles with. So, we’re open to new ideas. You’ll probably hear about some of these pretty soon, but right now we’re focused on getting this in the hands of as many users as possible.

Rob: So here’s what you do. You get Vanguard to offer it all of its client…

Jason: Yep. (Laughter).

Rob: … And they just have to pay you a tiny, tiny, tiny, tiny fraction per user that you both can go buy islands somewhere…

Brad: (Laughter). Exactly.

Jason: Yeah.

Rob: … And you’ve got 3 trillion under management using your Draft app.

Jason: I know you’re a big supporter of Vanguard, so do you have any say in there?

Rob: (Laughter). I have none.

Jason: Those are groups of people we’re talking with. People that share the same philosophy and beliefs we do in this low-fee, passive investment strategy.

Rob: It surprises me how, in my view, behind companies like Vanguard and Fidelity and the big mutual fund companies are with technology. Schwab tried their own robo-advisor service which I’m not a fan of, but that’s another topic. But I applaud their effort. Maybe it’s working out well for them. Maybe if you’re Vanguard, you’re like, “Look, I’ve got 3 trillion under management and all of the robo-advisors use our funds anyway, so we don’t need to spend the money to get into the technology end.” But even something like what you’ve guys have developed, I don’t understand why mutual fund companies wouldn’t use that kind of technology.

Jason: Well, I can tell you a personal story looking at that. I just got back from New York last night where there was a technology group of large banks and wealth management groups— all the names that you know out there in the industry. And they brought in 13 different start-ups (us being one of them) to hear about where the industry is going and what technologies they should be looking at. It was really refreshing for them because they’re attitude was, “Hey, we need to look at cooperating with these start-ups and new technologies versus trying to compete with them.” So it was refreshing to be at that conference and see that some of these big banks and brokerage companies are looking at these new technologies.

Rob: Well, you see, the cynical side of me says that some of these companies actually don’t want these kinds of technologies because it underscores the importance of fees. And the reality is, some household names— I won’t name any companies at this point, but some household names that have mutual fund arms and sell investment products, charge and arm and a leg.

Jason: Yeah, and what they’re realizing too is the new generation that’s coming about—the millennial generation—they know that they’re struggling and they’re attracting that generation. The smart companies know that they’re having to change the way they market and attract this new generation and the amount of wealth that’s about to transfer to the millennial generation.

Rob: Right, right.

Brad: We actually have a great personal story about Vanguard from one of our early users, if you’re interested/

Rob: Sure. Go ahead. That’d be great.

Brad: I think the best way of explaining the Vanguard story is to tell it side-by-side with another early user. Both of these early users are females in their early 30s. Neither of them had any idea what was going inside their investment accounts. One user is an attorney and when she started making money, she asked her parents what she should do and they told her to work with their guy at UBS because they had been working with him for a long time. So she did. And since she started putting money in that account, she just trusted that it was going up and that the guy was good. She had no idea what she was paying in fees. Another early user asked her parents the same thing when she started contributing to her 401k and they said just to put it in the lowest fee options and make sure you diversify it with several different options. The attorney found out, after connecting her UBS accounts, that she was aggressive, that she had under-performed substantially—the top-performing aggressive and that she was paying 2.6 percent a year in fees. She thought she was paying $40 a year in fees. That was probably a good reason why she was under-performing so significantly. The girl using Vanguard found out she was a top performer, that she was well-diversified and she paying .2 percent in fees. She screamed with excitement because she was so happy she was doing the right thing and she’s comfortable with her strategy going forward. The attorney is not so happy. She actually got pretty emotional when she saw that the top-performers were only paying one half a percent. She immediately fired her financial advisor and moved over to a well-balanced ETF strategy and feels much better about what she’s doing now.

Rob: Well, that’s a great story. Good for her. It still amazes me that there are still firms out there that will charge 2.6 percent, but the reality is, I know investment advisors who are the nicest men and women in the world and they’re going to charge you one and a half or two percent and they’ve got tens of millions of dollars, or sometimes more, under management. I just scratch my head… I don’t get it. In any event, that’s a great story. I hope you have more of those with some of your users as they start to use your app. Well, I wish you guys the best. This kind of app is great for retail investors, the regular folks who are trying to make the most of their money. So I wish you all the best.

Brad: Thank you.

Jason: Yeah, thank you. We’re excited.

Rob: So if folks want to check you out they go to draftapp.com. That’s draftapp.com?

Brad: That’s correct.

Rob: Alright fellows. I appreciate it. Thanks so much.

Brad: Thanks for your time.

 

 


Topics: InvestingPodcast

4 Responses to “Interview with Founders of Investment Portfolio Analysis App–Draft”

  1. The folks at draft neglected to mention that they haven’t opened up to the public yet. I’ve been on the waitlist for going close to a year now and doesn’t seem like I’ll ever get off the waitlist. How can we even check them out?

  2. Kevin, Than you for your patience. I know we have reached out to you directly as well. We know it has been a long wait, but we promise it will be worth it. We want to make sure the application gets to a point where the experience is one that will deliver what we have promised.

    Jason – Co-Founder, DRAFT.

  3. I am on the wait list as well. I appreciate Jason St Peter’s response. Would have been more comprehensive if he have any kind of anticipated ETA on the application. I dont know if you could ask for his response to this as well? Would like to know whether to wait or to invest the time in the setup of a different app.

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