| 23 April 2010

We wrote about KaChing in a series of articles recently and we took note of their shift to work more with RIAs. We suggested that providing a platform for RIAs was big business and that this was a good move. We know, for example, that The Charles Schwab Corporation (SCHW), Fidelity and TD Ameritrade (AMTD) increasingly rely on their custodial operations to drive assets, revenue and margin.

KaChing's real opportunity, we posited, was to position themselves as a lead driver. So we were pleased to hear about the firm's latest efforts: a new platform for RIAs called kaChing Pro. This platform is aimed at servicing the needs of what the firm calls "mid-level" managers, managing assets of less than $500 million.

We spoke with Andy Rachleff and Dan Carroll, co-founders of kaChing, and they made it clear right away that this was not an attempt to steal market share from the Schwab's of the world so much as it was an attempt to create a new platform for smaller RIAs and tap into a new marketplace. "Think of us as the Amazon.com storefront for mid-level RIAs," said Mr. Carroll. "We're addressing the growing RIA's biggest problem, which is growing their asset base."

Mr. Carroll estimated that, all told, firms managing less than $500 million represent a combined total $678 billion in assets. At the same time they believe they are creating a new way to connect investors to RIAs by building a marketplace of asset managers.

The kaChing Pro platform allows RIAs to create a white-label "storefront" for clients. In addition to this custom Website kaChing suplies a dedicated support person to each manager and a back-end analytic and communictation tool for RIAs to manage their accounts. Pro users can see how many accounts they have, the amount of assets they manage in each account as well as the total assets each customer claims, suggesting the marketing potential in their accounts. The charge for the service is 25 basis points.

The primary problem kaChing hopes to solve with the new Pro platform is the small account size. It's not uncommon for RIAs to require minimum account sizes of $250,000 or more. Smaller accounts are simply too cost prohibitive to service -- it costs firms more to manage smaller accounts then they would otherwise make in fees.

This creates two problems. First, when firms are just starting out it can be difficult to attract new assets of significant size given their lack of track records, experience or lack of referrals. This often means new RIAs must work with smaller asset sizes which they either underserve or simply service as loss leaders.

Vern Cushenberry runs one such small firm, Cush Capital, out of Overland Park, Kansas. He told us that the new kaChing Pro platform will allow him to offer the type of separate account management he currently delivers through Fidelity, but to much small account sizes. "To service an account as small as $3,000 on Fidelity," he told us, "I would be forced to put them into mutual funds." The implication is that this is a high cost alternative for the customer and doesn't provide Mr. Cushenberry with much competitive advantage over the customer simply serving themselves.

The second problem RIAs face is that larger firms often turn away smaller investors for the same reason: it's too cost prohibitive. And yet, ironically, as firms grow and develop track records and become more well known they often end up turning away more and more small investors.

Andy Mathieson, a partner at Fairview Capital out of Greenbrae, California, is one such adviser. Mr. Mathieson has been an investment professional since 1984 and his firm currently only accepts new clients with a minimum of $2 million to invest. "What kaChing Pro will allow us to do is to manage smaller accounts than our normal account minimums, in a way that is efficient," he told us in an email. "Moreover, the new website will provide us analytics on our client base that will assist us in crafting and targeting our message to these clients."

KaChing executives say they currently have 40 investment managers signed up for the Pro service and they expect to have 100 by the end of the year. Of the current mix, 20 RIAs also appear on kaChing.com. This provides a distinct advantage to managers who are trying to attract new assets. But in order to qualify to appear on kaChing.com these managers must meet criteria set forth by kaChing staff. (This select group was once referred to as "geniuses" but are now simply called, "Managers.")

Mr. Mathieson's firm uses Schwab for his primary asset management business and Mr. Cushenberry uses Fidelity. Neither sees that role changing. Instead, they view the kaChing platform as a way to create a new market for their services. And in fact Mr. Rachleff said they expect to partner with companies like Schwab in the near future.

For a guy who just wants to manage portfolios, like Mr. Cushenberry, the kaChing Pro platform provides an ideal solution. "I can offer what you might think of as 'wholesale investing,'" he told us.

Whether or not the service represents an improvement to individual investors, however, remains to be seen. Clearly kaChing Pro gives individual investors an opportunty to tap into the experience of established investment managers and invest directly in stocks through separately managed accounts, rather than through mutal funds or ETFs.

While this sounds good in theory, there are several potential problems. First, the accounts are not set up achieve individual goals and are not managed to individual risk tolerances. Fiduciary responsiblity is turned on its head in this case since it rests with kaChing and not with the RIA. Investors, for their part, are forced to decide whether a particular portfolio is right for them, rather that the manager working with a client to decide on a mix of investments that is right for the client.

In this sense, the marketplace of investment managers is not unlike a marketplace for ETFs or mutual funds. So kaChing, for its part, must work to differentiate the service on several fronts, including performance, transparency and the advantages of an indivudally managed account. If they can accomplish that, and if the managers perform consistently better than lower cost alternatives like index funds, then they will have truly developed a new and unique product alternative for indivudal investors.