Andy Rachleff: We're trying to build a business that attracts tens of billions or hundreds of billions of dollars.

Wealthfront raises a cool $20 million from VCs to pursue a big slice of a $1 trillion market

The Palo Alto fast-grower brought aboard a LinkedIn veteran who played a role in the 20-million- to 200-million-member jump; a VC tells how he 'leaned forward in his chair'

March 22, 2013 — 6:51 PM UTC by Kelly O'Mara

20 Comments

Brooke’s Note: This is a cool article by Kelly O’Mara. First I’ll credit Andy Rachleff (who may have a bit of a journalist’s soul; he’s written a couple of good columns for us) for doing a lively interview where he made an irreverent comment or two about human financial advisors knowing full well that he’s speaking to a publication whose readers almost universally value human financial advisors. (To be fair, Andy has a few human advisor types but most are engineers.) He also could — to keep the heat of expectation low — played it coy about his company’s ambitions. He didn’t. Andy is thinking and talking growth in hundreds of billions in assets. Even Schwab and Fidelity don’t talk that way — and Andy knows that. He also gave a detailed enough description of his business plan that the logic of how it miiiiggghhht work is there. A final note: Kelly also interviewed a real-live customer of Wealthfront, who is also a writer for TechCrunch who wrote a cool article of his own on this subject that is linked below.

Internet-based advisory platform Wealthfront announced Wednesday it has secured $20 million in venture capital from three firms, led by Index Ventures, as well as the Social+Capital Partnership and Greylock Partners, and from a number of individual investors.

Palo Alto, Calif.-based Wealthfront allows investors to put anything over $5,000 into an online diversified portfolio-based on their risk assessment — and for minimal fees.

With 70% growth in the first three months of the year bringing Wealthfront to $170 million in assets, it’s easy to see why the Silicon Valley-based backers’ ears perked up when the financial tech company came a-calling.

In a blog post this week explaining Index Ventures’ decision to invest, partner Mike Volpi explained that Wealthfront’s recent 30%-per-month growth attracted his attention. When he heard about the company’s growth, he wrote, “I quickly leaned forward in my chair.”

A trillion here…

Both Volpi and Reid Hoffman, of Greylock Partners, in his own blog post this week, cited the company’s recent high growth and the potential $13 trillion in non-institutional, non-401(k) assets as reasons their respective VCs decided to back Wealthfront.

Andy Rachleff, chief executive and co-founder of Wealthfront, says that his company’s not going after that whole $13 trillion, but maybe it could target $1 trillion of the marketplace, which is still plenty.

“We’re trying to build a business that attracts tens of billions or hundreds of billions of dollars,” he says in an interview with RIA Biz. “Our investors think we have a really good chance.”

Spending $20 million

The X-factor is if there’s anything to suggest that Wealthfront can continue to grow at a rate that will enable it to hit those high marks. Rachleff believes there is. He argues that it’s hard for traditional advisors to wrap their heads around why someone would want to invest $20 million in an internet start-up RIA, particularly one that is “nowhere near profitable,” according to him.

But that’s because traditional advisors are hoping to get, at best, a few hundred million in assets. That’s not what Wealthfront is doing. By making a high-end management tool available to everyone, with a minimum of $5,000, Wealthfront’s pool of potential clients is far larger and its costs far lower. The first $10,000 assets on the platform are free and after that it charges 25 basis points.

This capital will pay for an increase in expenses, Rachleff acknowledges, even though the company isn’t profitable, in order to “go after that opportunity.”

Less DIY, more delegation

For the last year and a half, since pivoting from an initial strategy that had the company bringing together money managers online, Wealthfront has been developing the investment management tools for its new strategy of providing complete wealth management through its website. That original plan was a bust, because it failed to attract interest from consumers, but it led Rachleff to this model: less DIY and more delegation. See: Looking more like Windhaven after a revamp, Wealthfront names a noted academic CIO and boosts its assets 15-fold.

Wealthfront originally raised about $10.5 million from angel investors and DAG Ventures in 2008. Now, says Rachleff, it’ll use the new $20 million capital to continue to add investment features, but, more importantly, to grow — just don’t call it marketing. See: Looking more like Windhaven after a revamp, Wealthfront names a noted academic CIO and boosts its assets 15-fold.

Sharing technology

In internet-based companies, Rachleff says, “growth is a function of features you add to make people share it.” That means ways to invite friends easily, send a link or an e-mail, and share online. But, $20 million will buy a lot more than a Facebook “share” button. The company recently hired a new vice president of product and growth, Elliot Shmukler, who was the senior director of product at LinkedIn, where similar tech-based growth strategies — think of all the ways you’re encouraged to invite people and add friends to your LinkedIn profile — increased the company’a membership from 20 million to 200 million. See: Advisor Tested: How LinkedIn can truly build your business and not just feed your ego.

Wealthfront also hired, recently, a vice president of engineering, Avery Moon, who was the senior director of engineering at LinkedIn. And, as they expand features, such as diversifying the fixed income allocation, they’ll hire more engineers to write the code. The company currently has 22 employees, the majority of whom are engineers

“Advisors are of no value” to younger investors, says Rachleff. Wealthfront relies on about five knowledgeable Ph.D.s and advisors, such as Burton Malkiel, to direct the investment configurations based on modern portfolio theory. The rest is just math. “You need to recruit a few experts to inform,” Rachleff says, and then you hire engineers to carry out those instructions. “You don’t need to hire more experts.”

The ties that fund

It’s a philosophy that has rung true in Silicon Valley, where there’s an app for everything. And, it’s no coincidence that 70% of Wealthfront’s customers are young and in tech fields. See: Can Silicon Valley rewire the RIA business? eBay investors think KaChing is the answer.

One Wealthfront customer, who also happens to be an editor at the popular site TechCrunch, wrote an article espousing his belief in the service. Eric Eldon wrote that after he opted to invest his startup earnings post-acquisition into Wealthfront, “I began making money from it immediately.” He says he achieved just over 4% and 5% respectively in his low- and high-risk allocations.

Eldon, who epitomizes the young, tech-centric entrepreneur the RIA is going after, says he started trying Wealthfront in November 2012, when it made the transfer process simple and easy. He came to the site after looking at other advisors, with whom he was unimpressed.

“I talked to some financial advisors, who recommended various packages that promised uninteresting returns, along with fees that looked to zero out any of those gains. I sat on the problem for months, unsure of what to do,” wrote Eldon.

Rachleff says the company deliberately targeted Silicon Valley because that market would be filled with early adopters, he said. The fact that it also happens to be where the venture capital funding and engineering talent and tech connections are was a beneficial coincidence. It’s an approach that is also bearing fruit for some conventional RIAs. See: A $17-billion RIA doubles down on a social media strategy that netted it 50 Facebook employees.

“It’s a nice side benefit,” says Rachleff.

Widows and military clients

Volpi’s blog post on the VC’s investment actually starts by referring to “our good friend Andy Rachleff.” Hoffman’s post references his relationship with Adam Nash, the current COO of Wealthfront, who previously worked with Hoffman at Greylock Partners as an Executive-in-Residence.

The ties between the Silicon Valley internet RIA’s executive team, its backers, and its customers are many and interconnected. It’s easy to see why the product might catch on quickly in the insular, start-up, tech-focused community. But it’s also easy to see why it might have trouble spreading beyond that sphere — which is the next goal.

Rachleff says, though, that there are “a number of adjacent markets that are ready to be knocked over” based on the fact that even without marketing or outreach 30% of Wealthfront’s clientele aren’t in that 35-and-under technology demographic. The company has elderly widows and lots of military clients, as well.

And, with a Dropbox-like feature that allows clients to invite friends and get $5,000 in assets managed for free, one-third of its new customers come in through the invitation system. Expect more growth initiatives along those lines as it tries to expand outside Northern California. See: Online brokers may be bigger threat to financial advisors than they realize, study says.

What’s the difference?

Certainly, Wealthfront is not the only venture trying to find an Internet-based solution for the mass market. Most recently, Microsoft-connected Motif launched with a plan to bring theme-based trading into the hands of the consumers. See: A Microsoft alum stomps into the RIA business with $26 million in VC money, Sallie Krawcheck and a 'new’ approach that looks old to skeptics.

But, Rachleff says that Motif may appeal more to the to the do-it-yourselfer. What about Betterment — another web-based RIA — that has gotten its fair share of attention? we asked Rachleff. “They’re more like a savings account whereas we are an investment account and that’s supported by average account sizes.”

Betterment’s average customer size is around $4,000, which is lower than Wealthfront’s minimum, he says, while Wealthfront’s average client is around $80,000. “Why would you use Betterment if you have access to us,” says Rachleff. See: After outcry, Betterment 86’s (but not on purpose) a blog post inflaming advisors.

$20 million worth of momentum

Debate about the mass market, tech-driven options can get fierce. Just read this conversation from last year on Quora about the difference between Betterment and Wealthfront. In the online debate, both sides argue extensively for their superiority.

“Betterment is simply better for most investors,” wrote Jonathan Stein, CEO of Betterment. That’s because his firm has no minimums, is more smoothly integrated, and has more customization. “In summary, don’t take my word for it; ask our customers. We’ve got a lot more of them than Wealthfront, and they love us,” he concludes.

Wealthfront, Rachleff believes, will succeed in capturing the most of this hotly fought-after market because people don’t want to do it themselves, they want to delegate, and because Wealthfront provides a higher level of wealth management than those people could otherwise afford. That the company was able to raise this money suggests someone else must believe him too.

The “$20 million is testament to venture capital believing we have a chance to build a really big business,” he says. “The momentum we’re experiencing is a contributing factor.”

The headline of this article was changed slightly to reflect that Wealthfront isn’t pursuing $1 trillion as suggested earlier. It has identified that there is $1 trillion that it considers in its sights. (For Wealthfront to make a suitable return for its investors, it needs about $40 billion of AUM or $100 million of revenue at the .25% that it charges, according to the company.)


Mentioned in this article:

Wealthfront
Portfolio Management System, Other, Tech: Other
Top Executive: Andy Rachleff

Betterment Holdings Inc.
Financial Planning Software, Asset Manager for RIAs, ETF Manager
Top Executive: Jon Stein



Share your thoughts and opinions with the author or other readers.

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Elmer Rich III said:

March 24, 2013 — 8:41 PM UTC

We can say:

- Scaling advice to a much larger level is needed. Likely government utilities will be created since life-savings are increasingly at stake. Losses in life saving become a threat to whole societies.

- Computer decision making is much better than human in most applications. The applications in medicine, etc.

- The current development model for computer solutions is based on a pretty narrow financial and VC/PE/etc. business model.

- The incentives on the VC/PE model are for fast rent-seeking, exits and arb profits. Problem-solving of paying customers is disincented. Spare the protests, let’s be honest.

So the likelihood of a real long-term, or even short term, solution is nil. The incentives are all to enriching the shareholders and exploiting the “customers” ASAP. These are usually sham companies — especially when the main shareholders cash out. That’s fine but it may take non-profit or government funding to deliver real solutions.

Also, these are complicated problems. We have a start-up project with real science and evidence basis and it is very hard to create something that really works.

Investors that are only interested in making as much money as possible – should never invest in, or be asked to get involved in, long-term problem solving. Tech or any other. Like the roll-up biz models – the incentives get all tangled.

I would say: “..always interesting to see people try to break into financial technology in (dum) ways.”

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Franklin Tsung said:

March 24, 2013 — 8:00 PM UTC

While there always will be a market share for virtual “something”, as the customer market goes into the high net wealth part of the food chain (HNW’s worth $5MM and above), the needs for a relationship based services will always trump any virtual machine, at least that is my opinion.

A do it yourself market might work for HGTV, and Home Depot, but you cannot bring automation to relationship.

What you need is to build a service and support technology to help the independent adviser scale their business and relationship demands.

Just my take, but always interesting to see people try to break into financial technology in unique ways.

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Franklin Tsung said:

March 24, 2013 — 7:48 PM UTC

Here is another man vs. machine platform.
http://go.bloomberg.com/tech-deals/2013-03-19-why-you-should-consider-taking-financial-advice-from-a-computer/

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Roger said:

March 23, 2013 — 2:31 PM UTC

You go to their website, complete a short questionnaire, a computer generates a recommended portfolio of low cost index funds or ETFs, you transfer your money and invest in those funds – sounds like Vanguard! The only difference is that you pay an annual 0.25% toll to buy Vanguard funds do it through their website.

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Jeff Spears said:

March 23, 2013 — 2:22 PM UTC

The Thundering Herd and small RIA’s should take notice.

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Ron_Burgundy said:

March 23, 2013 — 5:08 AM UTC

VCs and Wealthfront think they are disrupting the market. But Vanguard and DFA did this literally decades ago…. The competitive advantage for Wealthfront is what — hiring someone from LinkedIn and putting an academic on your board?? Meanwhile, you are going head-to-head with firms that have brand and true distribution power, not 'like’ and LinkedIn buttons.

This is the Overstock.com of the financial industry —- oblivious to the fact that Amazon.com already exists in 3 forms in this industry —— Vanguard, Schwab & Fidelity.

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Maurice said:

March 23, 2013 — 1:54 AM UTC

I don’t have anything to add to the intelligent conclusions presented here. I will add this fun experiment I conducted recently. I shopped these guys an others like them to get a first hand experience. Conclusion: they don’t have a clue about what they’re doing, at least at the client level. Denial is a very potent drug. Not to mention that competing on price is a path to zero. What a waste of $20M!

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Elmer Rich III said:

March 23, 2013 — 1:31 AM UTC

They will need the $20 m for lawsuits! Right, $T for everyone! These folks have no idea what they’re doing. These schemes have moved from the unlikely to the absurd. Apparently VCs do zero real research on the ideas they fund. Too funny.

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James Rooney said:

March 23, 2013 — 12:25 AM UTC

Does anyone realize how long it took Vanguard, PIMCO, Fidelity, et.al. to reach the size they are at? Those firms, which sell to individual investors, institutions, money managers, hedge funds, and have selling agreements with virtually every broker/dealer on the planet have been around for DECADES. Selling online to 30 year-olds with $25K Roth IRA’s is not going to get you very far.

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randomwalk said:

March 23, 2013 — 12:17 AM UTC

Aren’t testimonials as advertisements against SEC rules? There are 40 testimonials on their homepage.

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Bill Buck said:

March 22, 2013 — 11:14 PM UTC

If the Fed keeps printing money, we’ll all have $1 trillion. The problem is that a Starbucks coffee will cost $1 billion! LOL

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Mike Kane said:

March 22, 2013 — 10:47 PM UTC

Some reading may laugh at Andy, but the potential is there. We at Hedgeable (www.hedgeable.com) believe we can reach $1 Trillion in assets too, and there are room for others. At $1 Trillion we would still only be half the size of Vanguard or PIMCO. The momentum is there, and trillions will be flowing away from the entrenched old school firms over the next decade.

Mike- CEO, Hedgeable

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Elmer Rich III said:

March 22, 2013 — 9:54 PM UTC

Just read more of the article. lol I’m sure Brooke was rolling his eyes the whole time. It is really funny what these guys are saying. I’m sorry (not really) – this is completely idiotic. C’mon.

Good lord. Too many silly things to even start. The comments are good though. Do these folks even know they are in the most heavily regulated business in the world? Are the investors aware of potential lawsuits? Do these folks think they are investing in a movie or shopping website?

This is a great start to my weekend.

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Elmer Rich III said:

March 22, 2013 — 9:46 PM UTC

Good discussion. Hey, I hope these VC bright boys are all right. Probably, not that east. Darn it. Linked In > advisory business? Huh?

All this sound like just more supply-driven (funds available) than demand driven. Finding and service demand is real hard. Spending money is easy.

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Josh Meyer said:

March 22, 2013 — 8:35 PM UTC

It’s amazing how much money will be thrown to people who have never actually managed someone’s money before. I look forward to seeing what happens with Wealthfront when the market goes south and their clients have no one but a computer to talk to.

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Rick Ferri said:

March 22, 2013 — 8:06 PM UTC

“Advisors are of no value,” says Rachleff. That may be true for some people who have limited resources or believe that technology can substitute for human judgement. But it’s not the case for many investors who have gained experience and wealth. The affluent want advice from real people, not a computer. Even Andy Rachleff meets with his VCs face-to-face.

In truth, this is not a question of one or the other – it’s both. There are people who want no-touch and there are people who want a trusted adviser. The ideal RIA firm will offer both. It will have a very low cost “robo” solution and slightly higher cost trusted adviser solution that investors can upgrade to when they’re ready.

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Ken said:

March 22, 2013 — 8:05 PM UTC

Their white paper cites how they use quant screenings to find the best ETF’s in the market, yet Vanguard seems to be the only one they use. Where is the research out there about the 35% of mutual funds that outperform the index in long periods? I’d like to see a non-biased report.

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J. Rooney said:

March 22, 2013 — 8:05 PM UTC

So when they get to $1 billion under management, they will be taking in $2.5 million in fees, give or take? Then management wants their cut. Employees and vendors need to get paid. And the VC’s want a return on their $20 million.

At $100,000 average account size (current avg. account size is like $65K), they will need 10,000 investors, or approximately 7,500 more than they have now.

So let’s assume their profit margin at $1 Billion AUM is 20% (not likely, but let’s just say). That’s $500,000 in profit. Even at 10x profit, you are nowhere NEAR returning much to the investors. They need to be at more like $3-5 billion in AUM to make any reasonable return, which equates to 30,000+ individual investors.

I am guessing that a lot of the VC money is just “fun money” with no real hopes of making anything back. I would love to see the business plan on this.

I would also guess that much of the initial individual customer money (they’re not really “clients”) came from the investors/VC’s/management.

This wasn’t meant to rain on their parade. It was more meant to point out that investment advice in not cheap or easy. Why would someone go to Wealthfront when they could get the same exact thing for free at Vanguard?

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Kelly said:

March 22, 2013 — 6:44 PM UTC

The irony. Venture Capital firms charge 2% assets and 20% of profits to their investors and then fund a RIA that charges 0.25% to handle the money made by Silicon Valley employees.

Didn’t Vanguard have this business model worked out in the 1970s? Keep track of clients index fun portfolios? True, we live in a Google/Facebook world of like and share buttons. They have enough money now to survive. Congrats on the capital raise.

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null said:

March 22, 2013 — 6:40 PM UTC

The $20m in VC must be 'other people’s money’. I can’t see how this ends well for anyone involved.


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