Last fall, I wrote about Personal Capital, the online financial advisory service launched by former PayPal and Intuit CEO Bill Harris. Harris had recently landed $25 million in venture backing for the company, which combines the kind of portfolio-analysis tools offered by sites like Mint.com with one-on-one guidance from professional advisers – all for less than half the 2 percent of your portfolio that many financial advisors take in fees.
Harris and I sat down for coffee yesterday, and he was buzzing about his startup’s latest product line, which helps employers manage their 401(k) programs. Ah-ha, I thought, just as I’d expected! One analyst I’d spoken to last fall had predicted that Personal Capital might have a hard time getting enough individual users to trust the site with their finances and could end up having to follow the path of a similar company, Sunnyvale’s Financial Engines. That site launched 15 years ago with the goal of helping people manage their finances online, but eventually had to pivot into the 401(k) management space because that’s where the fishing was best.
Harris, though, told me the move wasn’t born of desperation. “Our adoption rate is actually ahead of schedule,” he said. But the more customers his team sat down with, the more Harris says they realized it was impossible to make a comprehensive plan for clients’ finances when so much of their nest eggs are tied up in employee-sponsored plans over which they have little control. Most 401(k)s, Harris pointed out, offer workers only a few different funds to choose from, and he said the fees can be exorbitant. In fact, Harris claimed, over a 40-year career, the typical employee of a small-to-medium business will see 401(k) fees eat up more than half of their retirement earnings.
I haven’t checked Harris’s math, but that’s pretty ugly if true.
So three weeks ago, Personal Capital launched its own 401(k) program and has already started signing up employers. “We offer great investment choices based on the user’s risk tolerance,” Harris bragged. “And the lowest fees on the planet” – one-half of 1 percent, to be exact. He says Personal Capital is really only looking to break even on the service, though he admits there’s a selfish motive at work: The more people sign up for a Personal Capital 401(k) through their employers, the more chances Harris and his team have to convince those workers to let Personal Capital manage all their investment accounts. Fiendishly clever.
It’s the reverse of the way Harris hopes to grow the 401(k) business: By getting current users of Personal Capital’s portfolio management services to entreat their employers to check out the company’s 401(k) program. The approach reminded me of the “freemium” method that enterprise software companies like Splunk and Box have used to grow their business: Offering a free product to individuals within a company, then going to that company’s IT department and saying, “Hey, you’ve got a bunch of employees using our product already, why not buy our premium service with extra bells and whistles?”
The difference, I guess, is that Personal Capital’s advisory services aren’t free — although if you only want to use the planning software, without the personalized advice, that doesn’t cost you anything.