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Wealthfront responds with force to Schwab CEO's robo announcement

The Silicon Valley-based auto-advice leader stokes its aura of invincibility by raising $64-million that it won't need anytime soon

Tuesday, October 28, 2014 – 7:49 PM by Brooke Southall
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Adam Nash: Having $100 million in the bank allows us to retain independence from Wall Street.

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.

Your move

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.

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Mentioned in this article:

Portfolio Management System
Top Executive: Andy Rachleff

Kate Mcbride

Kate Mcbride

October 28, 2014 — 9:01 PM

How can Schwab call a service that INVESTORS ARE PAYING FOR, albeit in an underhanded, under the radar way, FREE? If investors are paying, via rev share kickbacks (to Schwab) from fees on funds they’d better let investors know exactly what they are paying and what it’s for. That is NOT ' “FREE.” It’s astonishing that the spokesperson would say: “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.”

Really? Not meaningful to whom? IF this decision is based on the fiduciary standard then the ALL THE FEES AN INVESTOR PAYS MUST BE CLEARLY DISCLOSED TO THE INDIVIDUAL INVESTOR. And if Schwab is getting a kickback on this they’d better let the investor know, and clearly, what the individual fee is — not buried in 50 pgs of disclosure. Otherwise this would be a fiduciary breach. It is not in an investor’s best interest for fees (and whom they go to) to not be disclosed. This is, sadly, a major blunder on the part of Schwab.

Tom Dorsey

Tom Dorsey

October 29, 2014 — 2:54 PM

Steve Winks comments are right on! Wall Street has not got a clue what is happening to them. I speak to advisors each day and it is like their wirehouses choose to look the other way. Most participants have not been in the business as long as I have, 40 years. I remember when Schwab came on line in 1975. We laughed at them, sure no one would ever use a discount broker. You see I was a broker at Merrill, Lynch, Pierce, Fenner & Smith. It didn’t get any better than that. Ultimately Wall Street bankrupted itself where banks had to buy them saving them from chapter 11. Schwab continued to stand tall. Take this new offering they have, seriously. The ROBO’s will have to work with Wall Street or registered advisors at some point to make their business model work. Why pay 25 basis points for something I can get for free. It’s all modern portfolio theory anyway. Where the broker can excel above this “freemium” approach is to bring value to the table. The traditional broker is in the “value” business where Schwab is in the price business. If the broker competes on price he loses every time. So it comes down to the fact that if the brokers at wirehouses continue to use Modern Portfolio Theory in customer accounts, they are whistling past a cemetery. Now the question is how to retool the advisor to bring the value required to succeed in this new frontier.

Stephen Winks

Stephen Winks

October 28, 2014 — 9:39 PM

Robo-Advice as a faster and cheaper way to flip mutual funds is the established context in which “advice” is being promoted in a brokerage dominated marketplace, this type of advice is not remotely close to being advice as defined by statute .Even thought “Robo-Advice” may be better than brokerage advice products where advisors are neither accountable or have ongoing responsibilities for their recommendations it never achieves “continuous comprehensive counsel” and the “accountability” and “responsibility” required for professional standing. Thus, Walt Bettinger of Schwab is more likely to advance: (1) expert authenticated prudent process based on objective, non-negotiable fiduciary criteria like statute, case law and regulatory opinion letters notably missing in any Robo-Advice offering, (2) Schwab is capable of supporting all a client’s holdings not just ETFs or mutual funds which is essential to adding value, rendering individualized advice, and professional standing, (3) Schwab can advance multi generational leaps in technological innovation that streamlines cost and greatly enhances the degree of portfolio detail it is possible for advisors to manage, (4) Schwab can introduce a far more modern approach to portfolio construction than our largest broker/dealers that can not wean themselves from high cost packaged products (that make it impossible for the advisor to manage through product packaging to address and manage values essential for the consumer’s success), (4) Schwab can address work flow management and resourcing that are crucial to make advice scalable, easy to execute and manage not possible in an brokerage advice product or in a robo advice product, (5) unlike Robo-Advice, Schwab may give the advisor control over their value proposition, cost structure, margins and professional standing not otherwise possible.

The fact that a Robo Advice firm has $450 million, doesn’t mean it can execute. In fact the greater the number of developers the less likely the intended innovation desired will be achieved—the Apple/Google two pizza rule, to eliminate complexity in development, as development teams must be small.

If the focus is on (1) continuous comprehensive counsel as required by statute and (2) to give the advisor control over their value proposition, cost structure, margins and professional standing, (3) in the best interest of the investing public, Schwab will prevail. Robo Advice is presently the lowest common denominator of advice, cloning the brokerage business model which does not acknowledge or support their brokers rendering advice to avoid fiduciary responsibility. What Walt Bettinger is saying is that there is a fantastic opportunity to be the first firm to actually acknowledge and support expert authenticated advice—which is totally different from anything we have seen before. A much more substantive offering is going to happen, as since Adam Smith introduced the “invisible hand” in 1776, there has never been an instance where the best interest of the consumer has not prevailed.. Walt Bettinger and Schwab are in the game while Wall Street is sitting on the side lines.


Lisa Hedger

Lisa Hedger

October 29, 2014 — 2:39 PM

Greg, Right now it appears that the only revenues for this venture are revenue sharing. If those aren’t “meaningful” then there’s essentially no revenue for this program and it’s a loss leader? Is that correct? Lisa

Greg Gable

Greg Gable

October 28, 2014 — 10:00 PM


That is incorrect. Schwab OneSource does not play a meaningful role in the revenue model for this service. We encourage your readers to review the criteria for fund selection when we launch in 2015.




October 28, 2014 — 8:45 PM

Does anyone know how i can borrow some shares of this Spark Capital fund?



October 28, 2014 — 8:01 PM

Let’s get 2 things straight.

1. Taking $100 million in VC money does not “allow(s) us to retain independence from Wall Street.” You now have owners, demanding return on investment.

2. As a follow up, not putting a dime of that $100 million to work is a terrible use of capital. How that is a point of pride or interest is beyond me. If I were an investor I would be wondering what in the world Mr. Nash is doing with my money.

Greg Gable

Greg Gable

October 28, 2014 — 9:29 PM

To clarify, RIABiz states that Intelligent Portfolios depends on revenue sharing from funds for it’s revenue and to support the low cost. That is simply not true. The selection of the underlying funds has nothing to do with whether they are part of Schwab’s ETF OneSource program. The selection criteria are objective, they will be transparent and have to do with factors such as cost, bid/spread efficiency, etc. Underlying OERs on ETFs are there for all existing online advice platforms, but our scale and business model allows us to offer the program without fees. That’s a win for investors.

Mike Golaszewski

Mike Golaszewski

October 29, 2014 — 3:52 PM

Steve Winks and Tom Dorsey both get it. Schwab just validated the entire category of digital advice around 2 trillion or so times.

brooke southall

brooke southall

October 28, 2014 — 9:48 PM


To clarify, the RIABiz article does NOT state that Schwab 'depends’ on revenue sharing for Intelligent Portfolios. The article states:

“Schwab will make its money out of view through revenues sharing arrangements with the fund companies it hosts on its OneSource platform.”

From what has been disclosed by Schwab thus far, the only engine of revenue in Schwab Intelligent Portfolios is OneSource.

No doubt Schwab will have to draw down on other resources to pay for this offering like all the other start-up auto-advisors — 'depending’ on its corporate capital. And it will select some funds that are not on OneSource

But the revenues of Schwab Intelligent Portfolios, such as they are, will be derived (unless I don’t know something) from revenue sharing and revenue sharing alone.


brooke southall

brooke southall

October 28, 2014 — 10:14 PM


It seems like we define 'meaningful’ differently.

If 100% of revenues from a program derive from one fee arrangement then I just don’t feel it’s a leap to accord that arrangement meaning.


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