Wealthfront – Why Automated Advising and Millennials Were Made For Each Other.
FinTech at its finest.
Wealthfront was created around the new wave of investors in the market: millennials. Andy Rachleff found that a large portion of the money floating around Silicon Valley was sitting idle in bank accounts, as millennials were skeptical of active management post-2008, but also frustrated by an ultra-low rate environment.
Founded in 2011, Wealthfront’s business model is simple – they offer cost-efficient portfolio management to the masses, and they monetize that through a flat fee (25bps/month on your account balance less the first $10,000 and any bonuses from referrals). They aim to create a clean user experience, eliminate excess fees and still provide valuable investing options. With an experienced team and a compelling investment plan, Wealthfront has raised $129.5mm in five funding rounds[1], most recently valued at $700mm in 2014 on a $64mm investment led by Spark Capital [2]. The service has flourished ever since, hitting $2bn AUM in less than 3 years[3].
This success is largely due to the confluence of their business and operating models, which has led to accretive product innovation and organic sales growth. The factors behind this can be distilled into three major categories:
The Platform: The App, The Website, The Blog
Once you enroll in Wealthfront, you have access to the full platform immediately. That means you can track your portfolio via the web or an app on your phone/tablet. With over 60% of their clientele under 35 [4], this is a critical part of making the user experience as streamlined and transparent as possible. Wealthfront also manages an active blog, to engage the community and discuss topical economic and market questions. Here, the company continues to educate their audience, with posts ranging from product exploration (“Tax Loss Harvesting For Everyone”) to millennial-specific personal finance (“Optimizing Your MBA Financial Plan”). Such informational posts keep the company relevant and tend to double as free marketing, as users will post or share them with friends.
Ecosystem-Driven Innovation
Born of the Silicon Valley tech boom, Wealthfront works closely with tech giants and start ups to create the ideal product for its target audience. First, Wealthfront partnered with Palantir and Google to provide an integrated alternative for employee 401(k)s[5]. This pushed the company to create APIs which could easily interface with different employers. Now, all users can roll their 401(k) into Wealthfront, an additional source of revenue. Next, after extensive conversation with employees at Twitter, Wealthfront launched the single stock diversification service, a way for employees to strategically sell company stock through their accounts[6]. These nuanced features continue to differentiate Wealthfront in the financial advising sphere, provide them with additional revenue streams and further align them with the millennials they aim to please.
Software Scales Faster Than People
Traditional advisors charge 1-3% annually [7], as each advisor must spread revenue from a limited number of accounts over a fixed salary, constrained by man hours. Wealthfront can afford to manage your money at approximately 1/8 of the cost, with software and ~100 employees running the show. Their software can service an unlimited number of clients at a fixed cost, implying the incremental cost of each account is marginal. This model is well-aligned with the company’s goal to democratize portfolio management, and has allowed them to differentiate themselves as a consistently low cost advisor. Additionally, Wealthfront can then pool client funds and replicate the account size needed for private wealth management services, thus allowing retail investors to gain access to more savvy investing techniques such as tax loss harvesting and direct indexing. Thus, scale allows for enhanced offerings, begetting more scale and utilizing their competitive advantage: software.
“We’re not very concerned about the large companies being able to keep pace … they simply can’t innovate and deliver features fast enough. Instead, we’re focused on defining a better way to invest for this generation”
-Adam Nash, Wealthfront CEO[8]
Footnotes:
[1] https://www.crunchbase.com/organization/wealthfront#/entity
[2]http://www.reuters.com/article/venture-funding-wealthfront-idUSL1N0SN27E20141028#Y0gG2GqhOHuE0WG7.97
[3] https://www.wealthfront.com/two-billion#journey-to-two-billion
[4] http://fortune.com/2015/08/06/wealthfront-investing-qa/
[6] https://vimeo.com/91250594
[7] http://www.forbes.com/sites/rickferri/2013/05/27/the-heavy-toll-of-investment-fees/
[8] http://techcrunch.com/2015/03/03/wealthfront-now-manages-more-than-2-billion-in-client-assets/
Thanks for sharing this Monica! I have been contemplating using Wealthfront so found this to be an interesting read. Seems like Wealthfront’s success to date is based on a robust platform with an integrated community (via its app and relevant blogs) and a great user interface which reduces the hurdle for millennials to invest.
That said, I’m curious to understand what type of competition Wealthfront faces. I understand that they have a relative advantage relative to financial services via. retail, but what prevents another player from imitating the model Wealthfront has created? Is this a situation where the first one to scale and captures the hearts and minds of consumers wins?
Hi Kie – great question! I agree that for automated investment that is a serious concern, especially as they prove the economics behind their model for others to copy. Two aspects that I left out might clarify that – (i) they offer more Private Wealth Management adapted services than competitors do, and those typically require scale meaning only 1-2 players can win in that space (to your point). (ii) Wealthfront has a killer team, including Dr. Malkiel of “The Random Walk Guide to Investing” and Andy Rachleff of Benchmark Capital – those two add credibility to the product from both a financial and technological standpoint, and allow the company to recruit the best talent in the field.
I was very interested to read this post since my career has included time spent at a legacy player in the wealth management space. I think it is very interesting that Wealthfront’s customer base is primarily millenials. I can think of two reasons this may be. First, perhaps millenials don’t know the difference between good advice and less-good advice when it comes to wealth management (not passing any judgment on the quality of Wealthfront’s advice). Their discernment may be driven more by anti-Wall Street sentiment and higher inclination towards services delivered through technology. Second, millenials are only just beginning their careers and so are more homogeneous as far as their wealth management needs go. As they age, they will all need a different set of advice and services and will require much more customization. Furthermore, with more wealth to lose, trust becomes an increasingly important factor. Can the customization that exists today be emulated by software? After emerging from the “invincible” stage of their lives, will people trust their life savings to a technology company with 100 employees? I do not know the answer. We could be witnessing disruptive innovation right in front of our eyes.
David, fair point on millenials, and the reason why they are the initial target market. That said, until advisors can lower their fees or demonstrate more consistent success, automated investing seems like it will continue to see an uptick, even if that is just via ETFs. If that is the case, the masses will move further away from customization to some extent, and we will see a bigger divide in wealth management by demographics. This is where I see Wealthfront making a play – as Will mentioned below, they will be able to use scale to offer more nuanced investments to their customers. This could form a middle ground for people, and a moat for the company. As for trust, that will be the issue with expanding to GenX, I see that as a play that can only happen over time with a proven track record and smart partnerships.
Sign me up!
As I sat back and thought through the network effects of how this business should scale, it seems pretty incredible. To the points already raised in the responses above, it doesn’t seem like rocket science (in terms of ability to duplicate) and really focused on individuals earlier in their investing time-frame (“set it and forget it”) at this point. However, in my mind both of these issues are mitigated through scale (which at >$2B AUM seems like you’re getting there). I could imagine a world where:
– Scale allows the *option* to purse asset classes not traditionally available to typical consumers (e.g., PE, VC) – probably truly sets you apart from any type of competitor at this point
– Fee structure here clearly changes but sheer impact of having as an option significantly increases AUM and likely starts to expand upward into “Gen X”-type demographic
– More diversified user set allows company to explore other options – more fixed income, insurance derivatives, etc. that continue to appeal to an older crowd
I’m sure there are myriad legal hurdles to overcome there and a huge mental hurdle as well – David mentioned above but to his final point I think “we could be witnessing disruptive innovation right in front of our eyes”.
This is a great article, Monica. I think robo-advisors (and more broadly ETFs) are incredible innovations for the wealth management industry, especially given the plethora of mutual funds out there that are unable to prove that they are worth the fees they charge.
Having said that, I still question Wealthfront as a standalone business. It strikes me as something more appropriate as part of a wider product offering provided by the online retail brokers, rather than as its own company. Robo-advisors should represent a part of someone’s broader investment portfolio, and having a consolidated platform that also provides other options such as self-guided investing and, yes, even mutual fund investments, seems to be a much greater value prop for consumers. For example – Charles Schwab’s Intelligent Portfolios (its robo advisor product) has already blown past Wealthfront’s AUM with $21bn in AUM, despite only being around for a few months. I imagine it’ll be hard for Wealthfront to compete with the resources of the Big 5 retail brokers.
Lastly, the valuations around Wealthfront are astounding. At its 25bps fee rate, $2bn AUM implies only $5M in revenue (generous, since the fee is only applied after the first $10K). With that math, even at $100bn+ AUM, it seems hard for Wealthfront to deserve a $700m value.
Sorry. I misquoted Schwab’s number – it’s $4bn AUM. Vanguard’s robo-hybrid has $21bn. Not as striking a difference, but still the contrast is still interesting given it’s been around for 7 months.
The alignment between the business model – and the target market – with the service offerings provided paints a very powerful picture. While we may be living during the rise of a future landscape-transforming juggernaut, it is curious to me that you don’t hear of many others succeeding with a similar strategy. Is this because it is too early for imitators to have developed, is it a space where the first-mover advantage is particularly strong (To Kie’s point above), or is there another factor at play? Or, is there indeed a wealth of similar new companies that exist and succeed but don’t make headlines or Facebook advertisements?
Hi Mon, interesting post. This is an area I’ve been doing some work in recently as it’s closely linked with my Field 2 project in China. Having walked the streets of Boston talking to people in their 20s and 30s about their wealth management preferences during Dash Day, I see a lot of value in Wealthfront’s approach so far. Of the sample we spoke with, a significant majority was suspicious of existing wealth management platforms, largely due to a lack of financial know-how, so Wealthfront’s focus on educating its customers makes a lot of sense. For those who did invest their wealth, this was usually only in the form of employer 401(k)s, so granting the ability to roll these into Wealthfront is smart too.
To David’s point on customization above, our research found that millennials were indeed overwhelmed by the range of more active management options available in the market, and the potential number of decisions they might have to make themselves. Automated investing, albeit with some room for them to input their individual risk appetites and have these drive the percentage allocation of equities / fixed income, is therefore hugely appealing. Agree with David that as their wealth accumulates over time, the specific range of inputs they will want to provide will become wider and wider, but robo-advising technology will no doubt continue to become increasingly sophisticated as well.