Wealthfront, A Potentially Disruptive Online Wealth Management Solution, Is Funded By Silicon Valley Bigshots And Competes Against Advisors

Thursday, December 01, 2011 22:01
Wealthfront, A Potentially Disruptive Online Wealth Management Solution, Is Funded By Silicon Valley Bigshots And Competes Against Advisors

Tags: competitors | Financial Planning Apps | online financial advice | Wealth Management

Wealthfront is the latest in a series of incarnations of a wealth management platform funded by major Silicon Valley investors including Netscape founder Marc Andreessen and Jeff Jordan, former president of PayPal. And with each new incarnation, Wealthfront is learning from its mistakes and refining its business model and wants to become a competitive threat to advisors.

Founded in 2008 with more than $10 million in venture capital, according to TechCrunch, Wealthfront’s management team includes veterans of eCommerce and university endowments. Partners at Benchmark Capital, Index Ventures, and Kleiner Perkins Caufield & Byers are among the original investors. The company was originally called kaChing.

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In December 2009, Andrew Rachleff, a general partner at venture capital firm Benchmark Capital, one of the VCs originally backing the company, was named President and CEO. Rachleff, a lecturer on entrepreneurship at Stanford University, his alma mater, has overseen a major strategic shift in direction.
Till now, Wealthfront’s investment offering mimicked portfolios offered by separate account money managers and, thus, provided access to SAMs with low minimum investments. Investors paid Wealthfront between 50 and 200 bps depending on the managers used.
Today, Wealthfront phased out that business model and replaced it with a new investment product and an imaginative new fee structure.
According to the firm’s ADV, management of the first $25,000 in assets is free, and you pay 25 bps on assets above $25.000.
I’ve got a lot of questions about the business model and tried calling Rachleff and his PR firm at several different phone numbers this morning, but have not heard back from him yet.
To me, Wealthfront seems to have potential to turn into a disruptive force in the wealth management business. Here’s why.
Wealthfront has money. Benchmark Capital, where Rachleff’s a partner, has invested in more than 150 startups and manages nearly $3 billion in committed capital. Investments include AOL, eBay, Ariba, Juniper Networks, Red Hat, MySQL, OpenTable, Second Life, Yelp, Inc., Zillow, 1-800-Flowers, Ebags.com, Friendster, Palm Computing, and Seeking Alpha.
Wealthfront’s made mistakes but keeps refining its business model and trying again. It’s no wonder Rachleff lectures at Stanford on entrepreneurship; great entrepreneurs make mistakes and keep coming back and fixing them. That appears to be what Wealthfront is doing.
kaChing was just a first attempt at a wealth management platform by this group of Silicon Valley investors. According to GIGaom, kaChing offered investors access to managers that normally required a $1 million investment at just a $3,000 minimum and kept 25% of the investment manager's fee. In another incarnation reported on by TechCrunch, kaChing targeted mutual fund managers.
After Rachleff came, Wealthfront changed its name and he today essentially jettisoned Wealthfront’s existing solution for investors, called Money Manager Model Portfolio Service. Today’s announcement said that only current investors will now get access to that program; all new investors on the Wealthfront platform will invest in the new, much less expensive platform, which costs just 25 bps on assets of more than $25,000.
Ingenious fee structure. 25 bps is incredibly low, and free is even lower. Free means you can do some social good by giving really new investors a free way to access professional money management. But one day those really new investors will be grown-ups with real wealth and Wealthfront will have a foot in the door with them.
But the real genius of free is that wealthy investors can try out Wealthfront for free. If you have a few million dollars, there’s almost no additional risk to putting $25,000 on Wealthfront to try it out. If Wealthfront starts reporting that many of its clients are putting $1 million or two on its platform, then it becomes a competitive threat to independent financial advisors—even the group often referred to as “the profession.”  
Great Spiel. “Wealthfront's unique web-based Precision-Investing Platform is built around the well-known model of Modern Portfolio Theory (MPT),” says Wealthfront’s website. “Nearly every academic and investment professional believes MPT is the best approach to manage an individual's portfolio, but historically, rigorous MPT-based financial advice has only been available through high-end financial advisors. These advisors often require account minimums in the millions, and charge fees of 1% or higher.”  
“We’re democratizing access to the benefits of MPT with a service that is simple, cost-effective, financially rigorous and accessible to any investor,” the company website adds.
Marketing Against investment Professionals. A detailed explanation of Wealthfront’s investment methodology is entitled, “The Financial Advisor For The New Generation.”
According to the brochure, “Wealthfront, an SEC registered investment advisor, offers an online service that makes it possible for everyone to access sophisticated financial advice. Our unique Precision-Investing Platform pinpoints your risk tolerance to recommend a precise mix of ETFs to maximize your expected return for your specific level of risk and then periodically rebalances your investments whenever market changes move your allocation away from your risk tolerance level.”
To advisors building portfolios using low-cost DFA and other index funds or ETFs, the methodology will likely sound familiar.
A post on Wealthfront’s blog today, entitled “Introducing The First Online Financial Advisor Built In Silicon Valley For Silicon Valley,” throws down the competitive gauntlet.
“Six months ago, we started hearing complaints from our Silicon Valley-based customers about the wealth managers lined up in their lobbies,” says CEO Rachleff’s blog post today


“These 'suits' were taking advantage of the new wealth being created by the surge in IPOs. But our friends in technology companies didn’t trust the financial advisors, because of their high fees and biased advice," adding, “They started asking us if we could manage their entire portfolios in a quality way, but without all the costs.”


Rachleff told TechCrunch Wealthfront was today rolling out its platform to the “tech community, appealing to professionals from the tech communities who favor doing everything online, and are looking for ways to have their new wealth managed for far lower fees.” That’s smart marketing on two levels. Firstly, Silicon Valley geeks are early adopters of online wealth management. Secondly, coverage by the tech press of wealth management apps is naive.
TechCrunch and GIGaom reporters are great at covering technology but don’t know how asset managers charge retail investors. That’s why TechCrunch today totally missed the big story here: the fact that Wealthfront could be incredibly disruptive to the wealth management advice business because of its fee schedule—as in FREE. (Ironically, it is a free service best-suited for Occupy Wall Street types.)
Before advisors get too worried about Wealthfront and others of its ilk that are sure to follow, remember that really smart Silicon Valley bigshots have failed so far in trying to reinvent the wealth management business online. In fact, Marc Andreesen, one of the original investors in Wealthfront, cofounded Netscape with Jim Clark, who in 1999 started myCFO.com, which was supposed to be a revolutionary new wealth management system. That platform is still alive but never lived up to its swagger. It eventually was purchased by a bank and turned into a less ambitious advisor platform.


Comments (8)

I am a DFA advisor who provides globally-diversified model portfolios for 25-36 bps. I see Wealthfront as just another sign of downward pressure on advisor fees.

With today's technology and the enhancement in the design of mutual funds, the cost of managing money continues to drop...management fees will follow.

Maybe the belief that 70% of investors aren't concerned about fees is changing.

Darrell Armuth
darrella775 , December 02, 2011
Andrew - first, that is an excellent piece of reporting. Second, your description of this wealth management proposition as "disruptive" strikes a chord. Prima facie, it seems to blend the fee structure of "passive (index)" investing with an algorithm "manager of managers" approach to active management. Why, who (even) needs (professional) people, when it is all online? I forwarded your write-up to my wholesaler at SEI.
DTS_Driver , December 02, 2011
And if you have a question you can query their help base for FAQ's. Anyone ever try getting help from Google when they get your "Local" listing wrong? Free is great until it isn't. Free advice is great until it costs you a fortune because it's wrong. People pay us by way of AUM fees, but they are paying us for our knowledge, aren't they? At least that is the way it is supposed to be. Maybe free is the way it will all go, but free is never really free; Econ 101 - TAANSTAFL! And if they drive us all out of business because we can't work for free, then Goldman Sachs takes them public, and they are beholden to Goldman Sachs, who will stick up for all the people who didn't trust Goldman Sachs in the first place??? What happens when the guy with $250k or a lot less needs help but won't write a $7,500 check for a comprehensive financial plan, because he sure as hell won't get any help for $625 (.25% of $250k). What about the Garrett Network? If people wanted to pay $240 an hour for a clock that is always ticking, all the clients would already be over there, right? Price and value are not synonymous. Maybe our prices are not in line with the value people want; or maybe people don't know the value they need so only look at price. Sorry, just venting a little.
vguettlein , December 02, 2011
In reading through their whitepaper, it appears that their "professional advice" amounts to asking 6 risk questions "to determine their true risk tolerance", and recommending an "ideal asset allocation". Wow! That's incredible. Need advice about anything beyond those 6 questions? Here is Mr. Andreesen's personal phone number: 1-800-IDon'tThinkSo, try our user group for an accurate answer. And since their ETF picks are right there, why even pay them the 25 bips?
vguettlein , December 02, 2011
Thought-provoking comments.

Darrella775 is concerned with Wealthfront, and I think he's right to be. Vguettlein's research and assertion that Wealthfront's advice solution isn't very good, when compared to a real professional advisor,a good one.

But disruption occurs this way.

Clayton Christiansen, a Harvard professor who has written about extensively about innovation and disruption, says disruptive technology often starts out with a low-end solution and is not taken seriously. But it eventually gets perfected. He cites Japanese steelmakers as an example, saying they offered low-quality steel cheap and were ignored by US steel companies. Turned out, the Japanese were reinventing how steel was manufactured in the 1970s by making less exotic types of steel and then they crushed US steelmakers once they perfected their manufacturing system.

That's what Wealthfront is trying to do.
agluck , December 04, 2011
Whoa - the interesting point is Wealthfront's advice solution isn't very good, but is homogeneous with other offerings and TAMPs.

Wealthfront's real proposition is that we are not different from the TAMP your advisor is using, we are just cutting the fat (advisor) who collects a fee adding very little to the overall relationship.

Consider the SEC settlement with Morgan Stanley on the subadvisory relation that they did not monitor. This is waht most RIAs are doing. Getting a solicitor's fee from a TAMP, not advising.

brentb843 , December 06, 2011
Well, please do not lump the rest of us in with Morgan Stanley.
vguettlein , December 06, 2011
We need more smart people chiming in here. This issue is important to the future of many financial advisors.

The encroachment by wealth management apps on your turf has begun, albeit slowly.

The question to me is whether a shakeout will transform the financial advice business in 10 years or 30 years. And how far will it go?

Will the coming shakeout take revenue from advisors who today regard themselves as professionals? Or will the coming shakeout be limited to advisors who add little value?

And how will the rising role of financial advice advice apps affect the movement to professionalize the financial advice industry.
agluck , December 07, 2011

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