As social lending continues to mature, it comes to no surprise that the third party automation tools continue to mature with it. I’m excited to share that LendingRobot is now registered with the US Securities and Exchange Commission as an Investment Advisor. If you are a Lending Robot user you already received an email earlier this week. Besides this being a step in the right direction for third party tools, this change also comes with a new fee structure which I’ll outline below. I’m hoping this change will also prompt retail investors who were previously reluctant about using a third party tool to reconsider.
What does this mean for investors?
Since LendingRobot is now registered as an investment advisor, they now have certain obligations to investors. Basically, this means that they legally have to act in the best interest of investors, but Wikipedia has a much better definition if you’re interested in the details. As an example, Emmanuel Marot (Co-founder and President of Lending Robot) shared with me that this means that their personal investment accounts have to be delayed to ensure they never close the funding of a loan in front of a client.
I won’t try to restate the new few structure. This is copied directly from the email I received:
It also means we have to change our fee structure. Until now, we charged you 0.69% of the investments made on your behalf. We can’t do that anymore because charging a transaction fee pertains to a brokerage business, not an advisory business. As an Investment Advisor, we have to define our fees in a way that puts your interests first and doesn’t encourage us to make too many transactions for you. The most common practice is to charge fees based on ‘Asset Under Management’.
The LendingRobot fees will now be an annual rate of 0.45% of your account value, which equals cash plus the sum of the loans’ principals invested by LendingRobot on your behalf.
For instance, let’s supposed LendingRobot invests $100 on your behalf in a 36-month loan at 13% interest rate. Previously, you would have paid us a one-time fee of 69 cents at the time of investment. With the new fee structure, you will pay approximately 3.8 cents the first month, 3.7 cents the second and so on until maturity, totaling 72.7 cents over three years. Moreover, if the loan is paid back early, charged-off or sold, you just stop paying fees. This way our revenues are better aligned with your interest, which should be good news for you. On the other hand, because monthly fees will be much lower initially, we’ll charge a minimum of $2.95 per month per marketplace account to cover our transaction costs. This minimum will be triggered when an account value is approximately under $8,000.
A few more details:
- When calculating our fee, we exclude:
- Any loans you invest not through LendingRobot (manually or otherwise), and
- Loans invested until today through LendingRobot, since you already paid the one-time fee on them.
- The way it works precisely is that every day, we’ll calculate your accounts’ value and apply a fee of 1/365th of our annual rate to it (1/366th on bissextile years, because we like to torture our developers). We’ll produce an invoice every month.
Current LendingRobot customers will also have to accept a new agreement in order for LendingRobot to continue to invest on their behalf. I was excited to hear the news and I think it’s only the beginning of the changes we’ll see for tools like LendingRobot. I think another big win will be when investors don’t have to give their Lending Club or Prosper credentials directly to the tools, but rather some kind of key that allows investments on their behalf.
UPDATE 4/15/2014: I received an email that they are waiving the minimum fee. LendingRobot: 0.45% annually. No setup fees, no exit fees, no minimum fees.
What do you think about this change? Will this make you rethink automation with LendingRobot if you were previously reluctant? Please feel free to share your thoughts on this change in the comments below!
This sounds fair. So there will be no monthly fee until my Lending Robot ‘maintained’ notes exceed $8k ? Am I understanding that ?
How will Lending Robot be affected if Lending Club decides to ‘restrict’ it’s API ? Any thoughts on that potential development ?
Josh, thanks for stopping by. As of April 15 they have decided to no longer charge minimum fees. I have updated the post to reflect that. There will still be fees on any account value based on the amount that LendingRobot invests for you (see above), but there isn’t a set minimum anymore.
It will be interesting to see the API evolve. I have some thoughts on what I think might happen, but it is purely speculation. It has been mentioned that the “fastest/closest server gets the loans” isn’t exactly what they want loan selection to be. If you look at the way PRIME invests - there is a waiting line based on available cash/last invested among other factors. I have to imagine eventually the API will work this way. Thus, filters/modeling will be more important as opposed to investing with a tool that is simply the fastest. Time will tell!