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Emerging from stealth today, fintech startup Frec announced it has raised $26.4 million in seed and Series A funding led by Greylock, with participation from Social Leverage and others.
The company’s artificial intelligence (AI)-based investment platform has the potential revolutionize personal finance by simplifying complex investment strategies, historically the domain of the super-rich, and making them accessible to the average investor.
Founder and CEO of Frec, Mo Al Adham, told VentureBeat the startup’s approach is a means to “simplify the sophisticated investment products that have been traditionally only available via expensive white glove services.” Al Adham believes this could benefit the world at large, beyond the confines of wealth managers and family offices.
The company’s flagship product, Frec Direct Indexing, allows customers to create their own customized portfolios of individual stocks that track the performance of S&P indices, such as the S&P 500 or S&P Infotech.
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By owning individual stocks rather than buying an ETF, customers can take better advantage of tax loss harvesting, a strategy that involves selling stocks that have declined in value to offset capital gains taxes.
According to Frec, direct indexing can generate up to an additional 2.11% in annual returns compared to investing in ETFs or mutual funds that track the same indices.
Sophisticated retail investing with the help of AI
Al Adham said he started the company because he was looking for a platform that enabled him to self-manage his money in the same way that more sophisticated investors were doing with financial advisers. He said that he found that many of his friends and colleagues had the same problem and that some of them became his first customers and investors.
“We built Frec for the financially-savvy who want access to more sophisticated products than are currently offered by existing retail investment platforms, and have qualms about working with expensive financial advisers and old-school brokerages with complicated UI,” he said. “We made it our mission to build a modern, self-service platform that enables access to advanced financial products, like direct indexing, portfolio lines of credit, and high yield treasury funds to help them stay invested, even in a volatile market.”
Al Adham said that Frec’s direct indexing platform uses artificial intelligence to optimize the portfolio and minimize the tracking error, which is the difference between the performance of the portfolio and the index.
The platform also allows customers to customize their portfolio by adding or removing sectors or stocks, and to fund their account with cash or stock. Customers can also access a portfolio line of credit, which enables them to borrow up to a certain percentage of their stock holdings at a low interest rate, and a treasury account, which offers up to 5.02% on cash.
Standing out in a competitive fintech landscape
Al Adham said that Frec’s direct indexing platform is different from other robo-advisors that offer tax loss harvesting, such as Wealthfront and Betterment, because it gives customers more control and customization over their passive investing.
He said that Frec’s platform does not require customers to determine their risk level and then assign them a predefined portfolio of ETFs and bonds, but instead lets them choose and customize the index they want to track.
He also said that Frec’s platform is more cost-effective, as it charges a flat 0.10% fee for direct indexing, compared to some robo-advisors charging 0.25% for basic index investing, or a financial adviser, who could charge up to 1% for direct indexing.
“Our hypothesis is that there’s a lot of those people,” Mr. Al Adham said, referring to the category of customers who are financially savvy, price sensitive, and love to geek out on the best way to deploy their money. He said that these customers are underserved by the existing products and platforms, and that he wants to offer them a self-service platform that gives them more control and customization over their passive investing.
Frec is a member of the Securities Investor Protection Corporation, which provides up to $500,000 in insurance per account. Frec is also a fiduciary by law, which means it has to act in the best interest of the customer. Frec said that it has invested a lot in data security and has done audits to ensure its platform is rock solid.
By taking direct indexing mainstream, Frec is betting retail investors will embrace the complexity and risk of automated buying and selling. With the investor class hungry for new tools to maximize returns, the timing may be right for direct indexing’s democratization.
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