In all-out blog war, Adam Nash accuses Betterment of 'payday lending' and Jon Stein decries Wealthfront's cynical 'hatchet job'

July 9, 2015 — 12:57 AM UTC by Lisa Shidler

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Brooke’s Note: It’s the second attack of its genre on a major competitor by Adam Nash with the first one targeting Schwab’s robo and its fees. It shows that the first one was no fluke and that Nash doesn’t just pick on big corporations that everyone loves to needle from time to time. Here, he has blasted Betterment and drawn from it a full-throated response just as he did with Schwab. Schwab’s official response then was that Nash “presented a very loose interpretation of facts.” In his return of serve, Stein took a similar tack by presenting his side of the story in point-counterpoint style. One fact is sure: Wealthfront has gone from declining to serve investors with fewer than $5,000 in assets to proclaiming itself the champion of the micro-investor, and all in a New York minute. Presumably some small investors will win. It’s a moment that makes the head spin and reminds just how cutthroat this industry can be.

A war of words erupted this week between the top executives of the nation’s biggest Silicon Valley robo-advisors ostensibly over fees but really about the companies’ worldviews, experts say.

It started innocently enough when Wealthfront Inc. chief executive Adam Nash announced that his firm is lowering its minimum account balance requirement from $5,000 to $500 in a Tuesday blog entry entitled It’s time to kill the monthly fee for small accounts.

But Nash got personal fast, going on to slam his robo-rival, Betterment Inc. and, by extension, its CEO, Jon Stein.

“Since Citibank is an investor in Betterment, it might be inevitable that some of their tricks would seep into Betterment’s service. At $3 per month, an investor opening an account at $100 would be paying an annual management fee of 36% in the first year. In fact, it would be even higher in the second year since the fee doesn’t drop as your account loses value. At $250, it would be 14.4%. At $500, it would be 7.2%.”

Stein was having none of it and today rebutted that and other charges in a blog entry headlined Betterment sets the record straight.

And Schwab, too!

“In a marketing ploy designed to bait us to respond and thereby invite the press to pay attention to them, Wealthfront made knowingly inaccurate statements about Betterment. Some press love a good hatchet job, so much that they occasionally gloss over the facts — much like Wealthfront. I have faith that careful readers and reporters will see Wealthfront for what they are: spin artists. I’m loath to play this game, but my PR team insisted that I set the record straight.” See: After outcry, Betterment 86’s (but not on purpose) a blog post inflaming advisors.

In fact, Nash saved some of his most acidic, if back-handed, slams for the Charles Schwab Corp. and its recently launched robo-advisory service. See: A charged-up Walt Bettinger slams all non-Schwab robos at IMPACT 2014 with an energy appreciated by RIAs.

“How many Betterment clients are now paying this outrageous fee? 10,000? 15,000? 20,000? Like Schwab, they seem happy to tell their investors one thing, and their clients, another. This is also why we refused to raise money from the traditional Wall Street firms. The acid seeps in. There is no reason that this new generation of companies has to succumb to this abhorrent temptation set forth by the old guard. It doesn’t have to be that way. Vanguard took the right path. It can be done.” See: How Vanguard Group’s robo-countering effort got to $1.3 billion of AUM so easily and why its future seems bright.

Calling all startups

Alexey Sokolin: I do not think we should be taking Nash's accusations at face value.
Alexey Sokolin: I do not think
we should be taking Nash’s accusations
at face value.

Nash’s vilification of Betterment and idolatry of Vanguard may not prove good long-term strategy for Wealthfront, says Alexey Sokolin, chief operation officer of Vanare, a wealth management and robo-advisor tech platform for RIAs. See: An insider reveals turbo-contents of the In|Vest conference in New York, a summit of VCs, robo-founders and big banks.

“The strategic mistake for this positioning, in my mind, is that investment management is not a winner-take-all market,” he writes. “Quite the opposite, there are many firms managing trillions of dollars. So it is a marathon of building up credibility and brand in the marketplace, which is difficult to do at scale without having economics that work. And it is dissonant to cite Vanguard: comparing start-up companies backed by professional investors looking for billions-dollar exits with a non-profit makes little sense. I would certainly tip my hat if Wealthfront converted to a mutual structure, thereby focusing on mission over its cap table.” See: An insider reveals turbo-contents of the In|Vest conference in New York, a summit of VCs, robo-founders and big banks.

Schwab has thus far not responded to request for comment.

Nash went on: “Let this be an open call to all the FinTech startups out there. We can do better than this. We have to be better than this. Stop charging monthly fees for small investors.” See: With robo-advisors on the rise, robo custodian Apex is rising with them, a diamond mined from the rubble of the Penson Worldwide debacle.

Sokolin says that Nash’s comments, albeit effective fodder for some clients, may be more calculated than they appear.

“I do not think we should be taking Nash’s accusations at face value,” he writes in an email. “If Wealthfront had 1,000,000 clients today invested at $500 each, they would be losing massive amounts of money and looking for solutions to generate profit. There are hard fixed costs to trading, data, infrastructure and oversight. But they have deep venture backing and follow the Valley approach of focusing on market growth over revenue. So it is not surprising they would use Nash’s messaging, who has branded himself as a rogue vs. Schwab and Betterment, to draw attention to the launch of their differentiated feature. This branding probably appeals to many of their target clients.”

'Holy mission’

Nash’s ringing denunciations of Betterment’s wicked ways may be part of a bigger strategic game, suspects Will Trout, a financial services analyst for Celent LLC.

“I see this salvo as more as a shot across the bow of big players like Schwab and potential bank entrants such as Bank of the West, U.S. Bank, and even bigger ones, than a potshot at Betterment,” he writes in an email.

“Betterment is useful in this context as it is too good a target — New York-based, hubris-heavy — not to go after. But Adam Nash doesn’t see Betterment as his real competitor — if anything, Betterment is more of a stalking horse for going after the Wall Street and Main Street wealth managers.” See: Wall Street thriller 'Margin Call’ is a cautionary tale — even for RIAs.

Trout continues: “On the contrary, [Nash] aims to upend the way financial institutions — and by that I mean traditional advice providers like banks, brokers and RIAs — deliver advice, and how they charge for it. He’s not worried about what he sees as green shoots, i.e. Betterment, except insofar as they call attention away from his holy mission of disrupting investing. See: Adam Nash makes direct 'CEO-to-CEO’ plea to Schwab to rethink its robo.

We were young once .... Nash included this 1997 photo of himself and compatriots at Apple Inc. in Cupertino, Calif. in his blog attack.
We were young once …. Nash
included this 1997 photo of himself
and compatriots at Apple Inc. in
Cupertino, Calif. in his blog attack.

“What is really powerful and important to understand here is what Adam is not saying: that the model he’s creating (I’d call it a 'freemium’ model) is a creature of the tech world/Silicon Valley, and in fact, is the exact inverse of the traditional AUM based model, which rewards those clients who bring assets and punishes those who do not. It is designed to help build scale and crowd out (by lowering the pay wall) less nimble firms like Betterment. But most of all, it is designed to stand in stark opposition to what the industry has functioned, i.e. charge the hell out of the little guy in order to subsidize the HNW client.”

Trout concludes:

“That’s why Adam is targeting the Big Boys. He is swinging for the fences, and frankly, trying to measure a place for himself in history. Betterment to him is an annoyance.” See: Wealthfront responds with force to Schwab CEO’s robo announcement.

Shocked!

This Betterment-as-annoyance theory fits with a culture created at Wealthfront by its founder Andy Rachleff, who envisions a winner-take-all outcome for robo advice, in part by establishing dominance over monster social and search engines like LinkedIn, Facebook and Google. See: Credible reasons Facebook and Google won’t become robo-RIAs and other things I learned at Hearsay Social-Pershing event in San Francisco.

But if Betterment is a stalking horse, Nash seems to be whipping it like a rented mule.

“Taking advantage of those that can least afford it is not disruption. It is not innovation. It is worse than payday lending, and it needs to stop. Suddenly, the 1% that traditional wealth managers charge doesn’t look that bad. Why would a new company that professes to help small investors do this?” Nash writes.

“During Betterment’s most recent fundraising, I was shocked to learn through investor due diligence that the company brags about how much of their revenue comes from this $3 fee. Almost one-third. It’s really disappointing that Betterment has decided to build their business preying on those who can least afford it.”

Nash joined Wealthfront from Greylock Partners, where he was an executive-in-residence. Prior to Greylock, he was vice president of product management at LinkedIn. His resume also includes stints at eBay, strategic and technical roles at Atlas Venture Preview Systems and Apple.

Three times bigger

Adam Nash posted a Tweet showing his love of Acorns for slashing fees for young investors
Adam Nash posted a Tweet showing
his love of Acorns for slashing
fees for young investors

Stein responded to the Nash’s screed by emphasizing context — that Betterment’s assets have doubled from $1.1 billion to more than $2.3 billion in the past six months. See: Betterment’s Jon Stein talks human-RIA coopetition but breathes fire about fellow online RIAs.

“Betterment has more than three times the customers of Wealthfront, and the gap is widening, according to recent public Form ADV filings,” he blogged.

The Betterment CEO also accused Nash of lying about his firm just to promote its new $500 account balance minimum.

“In a post timed to promote this policy change, Wealthfront’s CEO knowingly made inaccurate statements about Betterment. These misstatements are cited and rebutted with facts below.”

Base canards

Stein went on to address point-by-point all of Nash’s comments that he felt were inaccurate.

“Betterment has always been accessible to all investors, and will continue to be. It’s part of our mission. We have no minimum, so that anyone can try our services. Among many firsts, we were the first automated investing service to offer fiduciary advice to anyone, regardless of balance, the first to offer free trades, and the first to make tax-loss harvesting available to all customers. As a fiduciary advisor, we are aligned with our customers, and it is at our core to put their interests first,” Stein says. “We’d welcome anyone to try both services, and see for yourself why the overwhelming majority of customers (more than three of every four) choose Betterment.”

Stein says that one of Nash’s inaccurate statements is that almost one-third of Betterment’s revenue comes from the $3 fee.

“Facts: More like one-third of one-third. Currently, we earn just over 10% of our revenues from $3 monthly fees. This percentage drops every month as we earn more deposits from existing customers and attract higher-balance customers,” Stein says.

Another canard, Stein says is that “Betterment has decided to build their business preying on those who can least afford it.”

Not true, says the Betterment boss. “Facts: The average net worth of a customer paying us the $3 monthly fee is $110,000. The $36 per year this customer pays is 0.03% of their assets, or 3bps. Hardly preying on those who can’t afford it. The average income of these same customers is $79,000. This average customer is clearly making enough money to invest $100 per month, which is what we encourage them to do, repeatedly, with the clear, stated incentive of lowering their fees. The vast majority of these customers are in trial with us, and we want them to commit more of their assets to us. We believe in the power of behavioral finance, and reducing fees has been shown, by our own data and by many academic studies, to be a powerful motivator.”

Acorns and coffee

Nash responded to Stein’s response on Twitter with a tip of the hat to executives at Acorns Grow Inc., a Newport Beach, Calif.-based firm known for its robo micro-accounts and for reducing fees for young investors.

“I’m disappointed to see that instead of doing the right thing like Acorns and getting rid of this exorbitant monthly fee, Betterment has shown their true colors. Justifying a 36% annual management fee on small accounts by saying those clients can afford it is just not OK. I’m not entirely surprised that they are nickel and diming their clients considering Citibank is one of their venture investors. See: Marty Bicknell buys a $1.1 billion RIA that serves the mass affluent, and taps credit for the first time.

Citibank, whose Citi Ventures Fund invested $3 million of the $105 million total raised from investors, did not influence Betterment’s advice model, says Stein.

“Facts: We set our current fee structure more than three years before Citi Ventures invested….Citi and their fund do not have a board seat, nor even observer rights. They have no say over fees or other decisions at Betterment. Citi Ventures invests in many popular and fast-growing financial services, such as Square.”

But while Nash referenced acorns, Stein concludes his rebuttal by referencing coffee.

“We introduced the $3 monthly fee to let those who want to trial us do so. $3 per month is the cost of a cup of coffee. Account opening and our high-quality, 7-days-a-week customer service are the most expensive part of our relationship with our clients, and every client covers those costs. If you commit to a $100 or greater auto-deposit, we know you’re a serious investor, and we can amortize our costs over time, and so we can charge even less.”

See Jon Stein’s full post here.

See Adam Nash’s full post here.


Mentioned in this article:

Betterment Holdings Inc.
Financial Planning Software
Top Executive: Jon Stein

Wealthfront
Portfolio Management System
Top Executive: Andy Rachleff

AdvisorEngine
Financial Planning Software
Top Executive: Rich Cancro



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

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Nanana said:

July 9, 2015 — 4:20 PM UTC

Well, I 100% agree that charging anything over 1% fee to any investor is just wrong. Let alone on the small guys. Should be 0.25% fee all around, no matter what.

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Pete Giza said:

July 9, 2015 — 7:36 PM UTC

Hey Biz,

This is rather amusing. Its “Robobashapalooza 2015” :D Soon robos will be charging negative 1% to grab marketshare. John Q will be elated.

Pete

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James Nasium said:

July 10, 2015 — 11:56 PM UTC

I like Rock’em Sock’em Robison better :-{)

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Jeff said:

July 20, 2015 — 8:33 AM UTC

Wealthfront sounds desperate. Understandable given that Nash doesn’t have experience in providing personal financial advice, but good at raising VC money. He didn’t exactly quit his job at LinkedIn in order to follow his passion of changing the world of personal finance for common-folk. Rather, he was a VC at Greylock Partners before jumping into an unprofitable robo-mess.

Anyone remember Ka-Ching? That was the company Andy Rachleff started before that game-based venture became Wealthfront. Unfortunately, I cannot remember the name of the company that proceeded Ka-Ching. While Ka-Ching was all about active money management, if your company fails then just reinvent yourself and borrow more money.

It might not be unusual to hear a Valley CEO preach growth over profit, according to Wealthfront’s press releases they have raised in excess of $130M in VC money. So they are burning through other people’s money and now owing $130M is a good thing??? Luckily, VC firms are notoriously reasonable – maybe Wealthfront will only have to pay them 200-300% in return. Ka-Ching.

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Clark said:

March 10, 2016 — 8:51 PM UTC

I think betterment is an amazing service. The argument that was made about their three dollar fee is just outrageous. You only have to contribute $100 a month and that is non existent. If you cant invest $100 a month you probably ought to be contributing to a emergency fund before an investment account.


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