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How Policy Genius can help you estimate your Disability Insurance Premiums


By Daniel Harris, RIA, Saturday May 14, 2016


When our family tried to buy disability insurance last year the experience was like being in a total black box.  The process took forever, we had no idea what anything would cost and we were basically flying blind.  Disability insurance usually costs at least a $1,000 a year in premiums and so it would be one of our biggest expenditures and yet we had no idea how changing certain features of our policy would impact our prices (our agent didn’t volunteer this information and we didn’t know enough to ask). 

However the disability insurance market just got a lot more transparent.  Recently, I discovered a great website called Policy Genius which offers to sell disability insurance online. 


It asks you 3-5 minutes worth of questions, like your career, exactly what type of insurance you want, how long it will take until it kicks in and how many years you want it to pay out for.  As you adjust these variables you can get an idea what will happen to your premium as the amount changes in the upper right hand corner of the page right before your eyes.


It provides great transparency to the market.  Unfortunately, when you get their actual insurance quotes, I found them to be about 25% higher than their estimate on the preliminary screen you go through.  I feel like that was not a positive experience since I didn’t provide them with any additional information between getting estimate and getting e-mailed the quote by them the next day. 


Based off the preliminary estimate, I thought they were going to be the low price leader, but in fact they were the most expensive option available – so they have some work to do there.  Their final quotes were about 20% more expensive than any other source I looked at, including the local agents I got quoted from in San Diego.


Policy Genius’s agent told me that there is no way anyone could be cheaper than them because “insurance rates are set by the state” but I checked their quote with the quotes from the other agents and the policy was identical and the riders were identical.  The only thing that was different was Policy Genius had a much higher price (about $20 higher per month or $240 per year) than the quotes I got from the local independent insurance agents.


In the process of buying disability insurance, I learned that there must be some sort of middleman or extra costs involved somewhere because every agent I’ve gone to has given me a different price for the exact same insurance policy and riders.  Either the insurance company isn’t being straight with their agents or there is some middle man cost somewhere that makes the identical insurance product cost a different amount depending on which person or online source you buy from.  This is why it’s important to shop agents as well as policies on disability insurance, which is something we do for our clients (we’re not an agent so we receive no compensation when a customer buys insurance).


Despite the pricing issue, my take is that Policy Genius is a huge step forward in terms of making disability insurance more transparent and easier to buy.  However, given their pricing issues, they aren’t quite ready for the big time yet in my opinion.  Even though they are backed by large insurance companies their quotes have not been price competitive with the independent agents that you can buy from (the brick and mortar guys).  For one client, Policy Genius’s quote was about $7,000 more expensive over the life of the policy than the cheapest quote I got from the brick and mortar guys.  That’s a big unjustifiable cost difference, which in my mind cancels out the convenience factor of being able to buy insurance online.


I really hope Policy Genius can bring down their costs (I have no idea why they are so high compared to their brick and mortar competition) because I think people will love their transparency and the ease of buying insurance online.  I’ll definitely try them again in the future and if they can fix their price difference between them and their competitors for identical products, I believe that they would be a great place to search for and buy disability insurance.



The Rise and Fall of Automated Investing Services


By Daniel Harris, RIA, Wednesday May 4, 2016


The last five years have seen an interesting change in the brokerage business, with a new group of software based firms trying to break into the financial industry and bringing with them a great innovation of automated tax loss harvesting which is quickly being adopted by brokerage firms across the industry.


I think they have fundamentally improved the experience and outcomes for the investor and I think their improvement (which has been quickly and easily adopted by their more financially secure competitors) will be standard in every brokerage firm and offered free to all clients in the future in my prediction. 


I believe that most of the innovator companies are unlikely to survive because the way they are structured they bleed money and their client acquisition costs are phenomenally high given their prospective revenues.  Moreover, the job of providing investment advice or asset allocation advice gets substantially harder the more assets you have invested in a similar strategy and client investment returns invariably fall over time as firm assets rise when they are invested in a standard platform – which is what they largely do at the automated services in order to save on firm effort.  The customer often loses under this approach, in our view, which is why we don’t endorse these products.


The useful innovation that will be standard in the future – the single click automated tax loss harvest


The automated advisors have brought on what I think will be the new innovation of our time – what I call “single click tax loss harvesting.”  It isn’t fully developed yet at these firms or their competitors but I think it is the future of a free but highly useful service in the brokerage business.


Wouldn’t it be great if when you wanted to tax loss harvest you could just click a single button and the software at your brokerage house could automatically find every security you had a capital loss in, sell it, and buy the most similar security that doesn’t violate the wash rules for you.  At the end of 31 days it would automatically buy back your original security.  You wouldn’t have to do anything aside from clicking one button once – it’s all automatic – and it saves you all that time that it takes to buy and sell tax losses and figure out what to hold while you are waiting out the wash sale period.  It’s also an emotionally easier way to tax loss harvest.


The companies that were early movers in this field are quickly being replaced by the automatic versions of these services at firms like Charles Schwab, Fidelity, TD Ameritrade and Etrade.  It isn’t really expensive or difficult to do automatic tax loss harvesting and I really think that is where the customer demand is.  Tax loss harvesting can and should be automated since no real human thinking is necessary to capture a tax loss.


Securities and Reverse Network Effects


One of the things that is really unique about the securities business is that investment advice does the opposite of scale – we have a reverse economy of scale in investment advice and everyone who is in this business and isn’t talking their book agrees with it whether it be Calpers or Warren Buffett or virtually anyone else in the field.  Formerly good investors see their returns drop as they get larger and the obvious culprit is that size is the enemy of productive investing.


Imagine you are at a giant auction and you have to buy $1 worth of corn.  You could play one seller off another and simply buy from the most motivated and desperate seller.  If you are patient, someone will eventually sell you that corn at a fire sale price almost guaranteeing that you can make a profit on the resale. Now imagine you needed to buy $1 trillion worth of corn – no one supplier can provide this and so you have to find multiple suppliers who all know your need for corn and know that they can price gouge you – which they most assuredly will do. 


That’s how the securities exchanges work.  The New York Stock Exchange, the Nasdaq, the stock exchanges in London, Tokyo, Hong Kong, Frankfurt, Milan, Shanghai, Paris, Shenzen, Toronto, Mumbai, Zurich, Sydney, Seoul and Stockholm are little more than interlinked giant corn auctions that take place every day.  But we don’t trade corn, we trade shares of profitable companies.  These markets are very efficient in matching buyers and sellers but they are also very effective are exploiting motivated buyers and sellers who have too much supply or demand for the market.  The $1 corn buyer isn’t exploited by anyone.  The $1 trillion corn buyer is exploited by everyone.  You don’t want to invest like the guy that has $1 trillion in corn to buy.


This is why there is no real economy of scale in the investment business.  In the brokerage business where lots of clients have different preferences there is economy of scale at least in clearing, reporting and back office work.  The brokerage firm isn’t telling you what to buy they are just saying they’ll get it for you.  Importantly, they don’t usually take on inventory of stock.  This protects them from losing their economy of scale.


But when they switch roles and become an investment adviser this becomes a major problem whether it be through mutual funds, ETFs or automated investing services.  Suddenly everyone knows what you are going to buy and often they know when you are going to buy it – and they can and do exploit that mercilessly creating a tracking error or trading loss for the fund customer.  The smaller and less liquid the supply of sellers the worse the problem is for the big firm and funds.  So these firms and funds are forced to concentrate on the biggest most liquid markets which are much more competitive and inherently less productive as investments and they pool their smaller investors into funds that invest in big markets that generate worse returns for their clients.  The client doesn’t need to have a poorer return – personally they don’t have so much capital that they will overwhelm the market – but when they pool it with many others they often do.


In their quest for liquidity automated investment advisors have taken the same approach as large mutual funds, which puts the customer at a disadvantage from the start in our opinion and forces them to invest their savings in markets that are known to be less productive.  This leaves the customer worse off in our view and is the reason why we don’t endorse these products. 


The second issue is the cost structure of these companies.  The companies have tremendous customer acquisition costs and tiny revenues and because of their fee structure they will probably always have tiny revenues. 


The investment business is bifurcated a little bit like Macy’s and Costco.  Macy’s products are very expensive and as a result there is a lot of money that is available for advertising, expensive store space ect.  Costco competes on price.  We all know when we go to Costco that it’s more of a spartan experience and Costco advertises in a sparse way.  Companies like Vanguard, Schwab and Fidelity were built on the Costco model and companies like Northern Trust, Bank of America and Morgan Stanley were built on the Macy’s model. 


The Costco model always does better in the long run but if Vanguard, Schwab and Fidelity burned money in their early days the way the automated investment services do, I don’t think they’d be around today.  I believe that when the VC money eventually dries up most of these innovator firms will struggle mightily because they have a really expensive business model without the profit margins to support it, in our view.  People who aren’t paid affiliate fees to recommend them (most bloggers are paid affiliate fees on them so it biases their recommendations) don’t seem to be coming to them at as fast of a pace – which is a problem because they are spending tons on advertising.  Moreover, their existing customers ask for more hands on treatment and to talk to a real advisor – which their business model really is not meant to handle.  Their massive apparent deficits are highly concerning to me, which is why I personally am very cautious about using these firms. 


For example, I see the automated investing services running ads on cable all the time.  I’ve heard the each 30 second ad costs around $13,000 on cable and I estimate that they are running at least 10 a day on the one channel I’ve seen them on.  That amounts to a burn rate of around $3.9 million a month or $47 million a year on cable advertising if they keep up this pace.  That’s a huge cost for companies with revenues of less than $10 million.  I was in the Silicon Valley in the 90’s and this type of business model reminds me of what it is was like during the first tech boom.


Additionally, the companies have hundreds of employees which the Economist estimates may cost them $40 to $50 million a year in salaries, buildings other costs.  The revenue of the largest of these companies is estimated to be around $7.5 million a year.  So these companies are losing somewhere between $43 and $93 million per year on their services according to my projections.  Part of me feels like this is a moment for the financial world.


I really like the innovations these firms brought to the table – but you can’t simultaneously be Macy’s and Costco – that’s a recipe for going out of business.  A part of me doesn’t really care whether they stay in business because the established players in the brokerage business have so quickly adopted what they did well.  Right now the leaders in the automated investment business are not the innovators but are companies like Schwab, Vanguard, and Fidelity – which is just to say the leaders in the brokerage business are still leading.


In the long run I think all major brokerage firms will adopt the automated tax loss harvesting innovation these companies brought to the market and it will be great for the investor.  As for their foray into the investment advising business – I don’t think it will last simply because it doesn’t scale and neither the customer nor the brokerage firm benefit from the client not doing as well as they should in the long run. 


Unless the regulatory system changes, I think investments will continue to be a highly fragmented business as it has been for hundreds of years simply due to the fact that we’re an auction, and auctions, by their nature, penalize you as you get larger and need more securities.  In the investing business the bigger you are the harder it is to invest successfully.  As you do worse clients eventually leave you – which perpetuates the historical fragmentation of the investment industry.  My advice to investors is to invest at their level and no higher because the lower levels of the market are actually the most productive and you should hang out there until you have so much wealth that you are priced out of them.

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