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The Silicon Valley-based auto-advice leader stokes its aura of invincibility by raising $64-million that it won't need anytime soon
October 28, 2014 — 7:49 PM UTC by Brooke Southall
Brooke’s Note: What raised the most eyebrows about Walt Bettinger’s heads up to Wall Street yesterday that Schwab is going robo bigtime was his proclamation that it’ll be engineered on a higher plane. “This is a much more sophisticated advisory program than we have seen so far in the market,” Bettinger said. As if there aren’t A-level engineers galore coursing through this realm. Exhibit A is Wealthfront, which has a gold-plated staff. With today’s announcement, it will also have uncommon running room and dollars to hire uncommonly talented engineers. Game on.
Wealthfront Inc. has raised $64 million of venture capital six months after raising $35 million — of which it has yet to spend a dime.
With the banking of this capital hoard, the Palo Alto, Calif.-based leader in managed business-to-consumer assets among automated RIAs with more than $1.5 billion of assets is sending a signal that it will neither give in to the daunting challenge at hand nor to giant invaders in the financial advice industry. See: Can Schwab, six years late to the robo party, 'freeze the market’, catch up and blow doors?.
Wealthfront chief executive Adam Nash puts it this way in an e-mail.
“Having $100 million in the bank allows us to retain independence from Wall Street, continue our razor sharp focus on our clients and do what we do best — relentlessly innovate and create new services for our growing audience of young investors.”
The latest round of funding was led by Spark Capital. It is based in San Francisco, Boston and New York and manages $1.8 billion and it is currently working to put the $450 million it raised in 2013 to work.
The announcement comes just 24 hours after Walter Bettinger, chief executive of The Charles Schwab Corp., located 33 miles to the north of Wealthfront, told Wall Street analysts that his company is prepared to roll out the biggest, baddest automated offering to date — and undercut competitors on fees by doing it for “free.” Wealthfront charges 25 basis points. Schwab will make its money out of view through revenues sharing arrangements with the fund companies it hosts on its OneSource platform. See: What’s up with Schwab getting into the robo-style online advice business and is Windhaven the linchpin?.
In those cases, the fund providers siphon the fees from investors and funnel it back to Schwab, which allows Schwab to advertise that its services are free. Revenue sharing has been at the heart of the debate over excessive and opaque pricing in 401(k) plans. See: What RIAs must know about hidden, and excessive, fees in serving as fiduciaries to a 401(k) plan. Not all of the fund selections on Schwab’s platform-to-be will involve revenue sharing, according to the company.
Schwab’s spokeswoman Anita Fox responds to a revenue-share query in this way: “Revenue sharing is not a factor in the decision of which funds are in the portfolios,” she writes in an e-mail. “That decision is made based on objective criteria within a fiduciary standard, and it doesn’t play a meaningful role in the economics of the program.”
Schwab previously disclosed that Schwab Intelligent Portfolios, its robo offering, will use ETF OneSource, which relies on fees that come from ETF providers. See: Why ETF sponsors are ponying up big fees to get on Schwab’s ETF OneSource in a bid for access to ticket-averse RIAs.
Schwab’s website explains its revenue scenario this way: “Schwab affiliates do earn revenue from the underlying assets in SIP accounts. This revenue comes from managing Schwab ETFs and providing services relating to certain third party ETFs that can be selected for the portfolio, and from the cash feature on the accounts.”
Millennials vs. boomers
Tech news website Re/code’s Jason Del Rey writes that his Silicon Valley sources say the raise puts Wealthfront’s value at $700 million
Wealthfront’s founder Andy Rachleff has taken the stance that his company doesn’t compete with Schwab because it is purely interested in millennials and Schwab is mostly focused on baby boomers. See: A New York Times article gets real on the topic of marketing to millennials.
“Much like Schwab and Fidelity built trillion-dollar businesses on the back of baby boomers, Wealthfront will grow with its millennial audience as they amass what is projected to be $7 trillion to invest in the next five years,” Nash writes. See: Fidelity and Betterment sign a deal with Steve Lockshin and Marty Bicknell as groomsmen at the altar.
No doubt it was attracted by Nash’s standard pitch to out-engineer, outlast and out-do the incumbents.
“The opportunity we’ve tapped into is huge. 90 million individuals huge,” Nash writes. “We want to be able to scale with our millennial audience, and it takes capital to be able do this independently. Our investors know this. We value our independence from Wall Street. and believe that in order to see real change in the financial services industry we need to remain independent, nimble and innovative.”
Currently Schwab’s offering is a coming-soon website=, with multiple “keep me posted” buttons and no other apparent navigation.
Mentioned in this article:
Portfolio Management System
Top Executive: Andy Rachleff
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