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In robo-CEO vs. Twitter gadfly battle, it was no contest as Wealthfront's Andy Rachleff does 'ultimate flip-flop' without tweeting a reply

The $10-billion robo-advisor may weather 'PR nightmare' but not thanks to Rachleff's 'Vanguard' explanation, critics say

Author Lisa Shidler April 25, 2018 at 12:03 AM
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Andy Rachleff says his firm's price drop is an act of conscience reflecting the good example of Vanguard Group. Some find the explanation hard to stomach.


Craig Iskowitz

Craig Iskowitz

April 25, 2018 — 2:12 PM
Setting aside the controversy about their fees and their new hedge fund owner, I believe Wealthfront's launch of Risk Parity funds is part of a bigger trend of B2C robo-advisors adding more complex investment products to differentiate themselves from Vanguard and Schwab. While Sokolin is correct that most clients don't understand what a Risk Parity Fund is, some do understand and are looking for alternatives to vanilla ETF portfolios. I expect more product announcements including UMAs, hedge funds and alternative investments to try and move upmarket and attract HNW clients.
Brian Murphy

Brian Murphy

April 25, 2018 — 5:17 PM
The whole Wealthfront risk-parity issue points to the structural problem of the industry to date - simply put, the costs outweigh the revenues. The current business model doesn't work. You'll see the same "issues" with any other proprietary products pushed through the pipeline. It's not the products themselves that are the point of contention but the economics of the underlying platform. Acquiring managed account customers, opening new accounts, moving money in and out of the platform, providing compliance on all those accounts isn't profitable at 0.25%. Wealthfront (and Betterment) have both gone about righting the ship by attempting to increase revenues. Betterment took the approach of selling 401(k) plans and adding personal advisors to the platform. Wealthfront's first salvo was higher margin, opt-out, proprietary products. The key to this industry is not in how to ramp the lifetime value of a customer from $500 to $1200 or more. The key is to rethink what you're trying to deliver in the first place and then build a platform to deliver that. First generation digital advisors think what the client wants is lower fees, an easy onboarding process for managed accounts and an intelligent approach to investing. Sure, they want all that, but they want more than that. There is a mis-match in what the target audience wants, and what is being delivered and that's why robo-advisor CAC is so high. First generation digital advisors aren't offering a product/service that is materially differentiated from what was already in place with the human advisors. Therefore they all fight for the same customers, increasing the CAC for all. There are deep lying assumptions in the industry that need to be challenged here...and today's robos have completely punted on thinking about them. The first being whether managed accounts are even the best approach to delivering next generation of advice. I would suggest not.

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Mentioned in this article:

Nexus Strategy
Consulting Firm
Top Executive: Timothy D. Welsh

Portfolio Management System
Top Executive: Andy Rachleff

Consulting Firm
Top Executive: Michael Kitces

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