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Wealthfront busts through $20 billion mark with its 'break things but make it happen' approach, but it's bedeviled by details when it comes to customers

CEO Andy Rachleff near doubles assets with high-interest paying robo-bank as new tailwind, but with brand risk as customer service may not be keeping pace, according to one cautionary tale.

Sunday, September 15, 2019 – 2:42 AM by Oisin Breen
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Michael Cohan: No information can be revealed at any point, lest laundering proliferate unchecked and unabated around the cosmos.

Brooke's Note: Uber, AirBNB, Google, eBay, Facebook and Amazon.com. Throw out the old growth expectations when it comes to top web-based firms. It can be explosive. It's that potential that fixated financial advisors when robo advisors came to be. But then most robos failed or their CEOs {like at SigFig or FutureAdvisor) downshifted to safer business models. Wealthfront CEO Andy Rachleff battles on, unwilling to yield to a temptation to take on a more bricks and mortar persona. Finally he has some explosive growth to show for his dogged approach -- a near doubling of assets in the past year from $11.5 billion to $20 billion. But AUM and banking deposits --which comprise $5-$6 billion of the new $8.5 billion -- are not the same and neither are the servicing requirements. People expect cash to move like lightning. It's why people hold cash. This story shows Wealthfront struggled with this challenge with at least one customer who wanted their cash back, got bureaucratically bogged down, then shared their frustrating experience with RIABiz. It shows that perhaps moving so fast could take a toll on Wealthfront and its brand. It's admittedly hard to tell with such a small sample. The next year will be very interesting to observe at Wealthfront.

Wealthfront's robo-bank is piling up cash to the tune of $1 billion to $1.2 billion in net new assets a month, the company claims, even if it has yet to master the finer details of customer service that brick-and-mortar banks offer as a matter of routine. 

Scott Smith
Scott Smith: Anyone would give an arm and a leg for even half of these new clients

In what otherwise might have been a footnote to its success, robo-bank customer Michael Cohan is proving, however, to be a case study of what can go wrong when a company loses sight of its customers.

Cohan, founder of Miami-based academic consultancy MBAPrepAdvantage, joined the rush to take advantage of Wealthfront's high interest rate offer with $63,000 in deposits. 

Then, he ran into a thicket of red tape when he tried to withdraw $8,500 to pay bills. After getting a bureaucratic run-around, the firm finally tossed him -- and his cash -- to the curb.

In the process, he learned a hard lesson. There's more to a bank, than chasing high interest rates. 

"By selling a checking/savings account to me, I had assumed that this checking/savings account would meet the basic features of such a checking/savings account. One of these features is the timely transfer of funds to my own banking accounts; their account could not meet this basic requirement," he writes in an email to RIABiz.

Andrew Pulido, a staffer in brokerage operations for Wealthfront, and one of the representatives in contact with Cohan, wrote that any issues were a result of "significant anti-money laundering rules and regulations that [Wealthfront] carefully follow[s]."

Tricks and games

But there's diligence and then there's superciliousness, says a source in the RIA cash-account business who prefers to remain anonymous to speak freely. "[It's] all the same tricks and games used by the brokerage industry, and these guys are supposed to be RIAs," the source states.

Kate Wauck
Clients with cash accounts are now using the firm's investment services, says spokeswoman Kate Wauck.

Indeed, the potential difficulties inherent in managing cash through a brokerage model -- Wealthfront Brokerage in this case -- especially from a fiduciary standpoint, have not gone unnoticed.

During an hour-long interview on Betterment's push into profit in late July, the firm's CEO, Jon Stein, confirmed that the cash broker model was, in his view, likely to prove problematic, because it pitches Wealthfront's interest in profiting from the spread on the cash against its clients needs.

It is pertinent to note that Wealthfront is not, in fact, a bank. See: Betterment paints it black in robo retail, making it a 'real company,' with JP Morgan and Bank of America on its new whiteboard hit list.

It's a reseller of a reseller of banks -- namely the services of Hackensack, N.J., cash sifter Total Bank Solutions. It sells access to, and the means to use, a network of FDIC-insured deposit accounts, much like NYC vendors MaxMyInterest or StoneCastle. See: StoneCastle storms into RIA market with high-yield, FDIC-insured accounts in direct challenge to MaxMyInterest for the title, King of Cash.

The incident may cast a small shadow on Wealthfront's robo-bank windfall, but it's not the only thing shading WealthFront's race to  $20 billion in assets. 

Muddy waters

News of the pole-vaulting assets broke in an email sent to selected reporters and analysts.

Jon Stein
Jon Stein: We chose to go down the RIA [route], not the broker-dealer [route], because we're a fiduciary.

New products, including high-yielding savings accounts, have helped Wealthfront double its assets to $20 billion in the past eight months, InvestmentNews breathlessly reported, Sept. 9. 

But the Redwood City, Calif.-based firm's unwillingness to reveal how much of this surge can be attributed to cash, and how much to investments, left analysts scratching their heads.

Wealthfront spokeswoman Kate Wauck did not address the question in correspondence with RIABiz, nor did senior communications associate Akhay Vyas, in response to questions from InvestmentNews. 

Instead, Wauck emphasized that Wealthfront is now a "leader in this new category of next-generation banking services," Significantly, she noted that Wealthfront is starting to make significant hay cross-selling its advice to its new cash clientele.

"We’ve seen growth across all lines of business and are very encouraged by the number of cash account holders who are opening investment accounts," she says, via email.

Akshay Vyas
Akshay Vyas, like Wauck, did not break out the value of Wealthfront's cash assets separately from its investment holdings.

"We [saw] a similar spike when we launched our financial planning service [last year], and again this year with the launch of our high-interest cash account."

The most recent figures available prior to this news had Wealthfront managing $13.5 billion, of which at least $1 billion was in cash. The sum was reported in March by CNBC.

But Wealthfront's Investment Advisor Registration Report, Form ADV, muddies the waters.

It lists Wealthfront's investment-linked AUM at $11.4 billion, as of Aug. 13. This is the same figure that was listed in February and just $100,000 higher than amount listed in Sept. 2018 ADV. See: Wealthfront adds staggering $1 billion to its robo-bank in 'less than a month', but critics say it's treading the line, again, on possible conflicts of interest.

Wealthfront simply hasn't gotten around to updating its ADV figures, says Wauck. "It's confusing because we updated the ADV with our new Palo Alto office address in August so it’s dated from that update," she explains.

One source, speaking anonymously to provide more details, suggests Wealthfront currently manages an estimated $14 billion, and holds an addition $6 billion in cash. That means it's landed the sizable sum of $1 billion in net new cash assets each month.

Double win

Despite lacking updated figures,  Wealthfront's cash accounts have proven an undeniable hit. For a firm built on the Silicon Valley mantra, "move fast and break things," reselling low-tech, high-interest cash accounts to users of its high-tech, low-balance investing services provided a double win.

It's a genuine win for Wealthfront, says Scott Smith, research director at Boston-based consultancy Cerulli. “Anyone would give an arm and a leg for even half of these new clients … it’s a bunch of potential wealth management clients!”

Cash accounts reduced Wealthfront's client acquisition costs and what was then the highest interest rate -- 2.57% -- in the country provided a huge publicity boost. See: Andy Rachleff lambasted competition for timid cash account offerings, but eats his own words with a pull-back to a middling 2.32% rate after Fed cut.

After Fed rate cuts, Wealthfront cut its rate to 2.32%, ranking it below several other outlets. See: Andy Rachleff lambasted competition for timid cash account offerings, but eats his own words with a pull-back to a middling 2.32% rate after Fed cut.

"With cash and investment accounts, [client] duration is probably [also] much higher, so there’s limited downside," says Smith. "They’ve made a great offer to the market, and [now they’ll] sell their long term value."

By April, it was clear that Wealthfront was onto a winner when the firm announced it had brought in close to $1 billion in net new cash assets in "less than a month."

But details also count. 

Rush to market

Wealthfront CEO Andy Rachleff advocates a 'minimum viable product' approach to get to market, then applying polish after collecting feedback.

But Cohan reached out to RIABiz to tell his story because he wanted it known that when a startup rushes a product to market, the guinea pigs are often its customers.

"[I was] uncertain when Wealthfront would allow me to withdraw funds ... [and] upcoming short-term expenses [of $7,500] exceeded available checking account funds," says Cohan, via email.

"I was so concerned about liquidity because not only was Wealthfront denying my ACH transfer in their system, they would not give me a routing number to have Wells Fargo ACH through Wells Fargo's system," he said. 

Cohan was lured to Wealthfront by its then market-topping headline interest rate of 2.57%.

Until he saw Wealthfront's offer, Cohan held his cash savings at Wilmington, Del.-based Comenity, which paid 2.45%.  In comparison, Goldman Sachs' Marcus offered 2.15%; as did Ally Invest.

Show me the money

Cohan said he'd made three deposits, two from Wilmington, Del.-based Comenity Bank, and a third from Florida's First1Bank, bringing his balance to about $63,000.

The timeline of Cohan's cash
The movements of Cohan's cash as a timeline (click to enlarge).

He said he first attempted to withdraw $8,500 to his Wells Fargo account on July 19*.

His request fell foul of Wealthfront's adherence to the letter of the law, and its refusal to involve a third party to clear Cohan's transfer. Because he had not deposited through Wells Fargo, Wealthfront refused to transfer money there.

"17 days after depositing the funds from Comenity Bank, Wealthfront abrogated my ACH request to Wells Fargo, because this bank was not the original bank that had deposited the funds … [and] instead transferred the funds back to Comenity without my permission, despite indicating on their website that ‘withdrawing to a different bank account than the one used for initial funding’ is possible," he explains.

"Wealthfront stated this action occurred because of their anti-laundering measures, but when I pressed Wealthfront about which precise measures, they refused to state the specific SEC or FINRA regulations that their policy adheres to."

Ultimately, Wealthfront did provide the rules it follows, namely FINRA Rule 3310, covering anti money-laundering (AML). It requires "reasonable" oversight, adherence to the Bank Secrecy Act, third-party compliance oversight, a named AML lead, training and risk profiling of customers.

Screenshot of part of Wealthfront's final series of emails.
(Ironic) Screenshot of part of Wealthfront's final series of emails to Cohan (click to enlarge).

The firm also said it had "comprehensive policies" that it withheld from its customers, and that these are what Cohan fell afoul of.

"For security purposes, we do not disclose all policies, however, we do disclose the following in section 2, Part VII of our client agreement," wrote Parker, a customer service operative at Wealthfront.

This clause states that "Wealthfront Advisers may undertake appropriate actions to ensure compliance with applicable law or regulation, including, but not limited to, freezing or forcing a withdrawal of the Client’s cash or assets from Wealthfront Advisers."

Twisted tale

But the fact that it was impossible to know of these 'secret' policies in advance draws Cohan's ire.

Wealthfront terminates Cohan's account (screenshot)
Wealthfront terminates Cohan's account (click to enlarge).

“Have you ever heard of any FDIC- or FINRA-governed institution not releasing funds domestically to a different bank account of the client than the one used for initial funding after three weeks, without first having disclosed restrictions?” he said.

A further twist in the tale is that Wealthfront's obligation to return Cohan's funds promptly, once it closed his account, appears to have fallen afoul of the same internal regulations that so irked him.

According to Wealthfront's 'Danny,' this compulsory transfer also got held up because of a "five-business-day hold," triggered because Cohan had tried to authenticate his account with a $1 deposit from his checking account on July 25.

Until Cohan followed up on Aug. 1 with a query as to the location of his funds, Wealthfront failed to let him know this, he says, despite the fact that its client portal informed Cohan the transfer was in process as of July 26, to be finalized by July 30.

Cohan's second withdrawal is made thanks to an "exception".
After Cohan's first $8,500 withdrawal was rerouted, his second withdrawal of $1,800 was blocked twice.

This denouement came after exchanging 24 emails -- 11 "substantive emails from Wealthfront" -- and two phone conversations.

"Maybe you can add an adjective [to Wealthfront's advertising] ... 'non-withdrawable returns,'" he says. "Wealthfront [had] three weeks to verify my account’s identity since my initial deposit. Every other institution needs only a couple of days."

Cohan tried a number of approaches to arrange the $8,500 transfer, including an offer of a three-way phone-call between his bank, Wealthfront and himself. He claims Wealthfront never directly responded to his offer.

Eventually, his cash was unceremoniously dumped back in his savings account at Comenity Bank without his authorization. He was informed that this was because he had originally transferred it from there.

"We no longer feel that we are a match for your long-term cash needs. Thus, we are terminating your account," wrote 'Danny', a customer service staffer at Wealthfront, via email. "No further communication is required. Any phone calls will result in an immediate termination of the call."

Waiting...

It took eight days for his funds to be returned to his account, after Wealthfront's decision to drop him as a customer. The first tranche of interest payable, due Aug. 1, did not arrive until Aug. 5.

Wealthfront Promotional Materials for its cash account
Wealthfront Promotional Materials for its cash account (click to enlarge).

The second and last tranche came after Sept. 4. However, Cohan currently disputes the sum received of $0.01, noting that the one day interest due on his then principal of $53,421.77 comes to approximately $3.40.

Either Wealthfront is incompetent, or it's deliberately obfuscatory, says Cohan.

"[It] seems to continually have problems with disclosure, which could be seen as intentional or, to be charitable, a product of their coming from a technology industry with less regulation in this area."

"Rubbing salt in the wounds, the various reps keep saying Wealthfront is serious about anti-money laundering, when nobody will point me to any regulations that are applicable," he adds.

Arguably, Wealthfront's determination to stick to the letter of the agreement it signed with Cohan demonstrates precisely such seriousness.

Timeline of the process.
Cohan's (abridged) timeline of his ordeal (click to enlarge).

One industry observer with a track-record following RIA cash management, speaking off the record for the sake of candor, says that perhaps the most frustrating thing is how poorly Wealthfront’s behavior meshes with their holier-than-thou high technology persona.

“Wealthfront sold, and still sells the idea that they’re not only reinventing technology, but ‘Branson-izing' the culture and ethics of doing business with banks and brokers,” the source states. “They’ve really laid it on thick.”

  The big issue with Wealthfront is that their way of doing business is unclear when you sign up; whereas their rivals are clear about their way of doing things, says Cohan. “Their competitors disclose their policies about prohibiting the transfer of funds to a different account than the initial funding account explicitly on their websites, so potential customers can factor this disclosure into their decision making."

"Furthermore, these competitors provide means for customers to authenticate their identities to complete withdrawals, sans the drama,” he adds.

Appropriate disclosures

New York City-based Betterment and Redwood City-based Personal Capital, for instance, offer similar services, with appropriate disclosures.

Wealthfront's withdrawal timelines
Wealthfront promotional material for cash accounts (click to enlarge).

Personal Capital publicly discloses AML restrictions. Depositors can only withdraw funds to the original depositing account for the first 60 days, unless government ID and statements are provided, it states.

Betterment "[has] similar risk checks and protections in place to protect [its] clients,” it states.

Wealthfront, however, states on its website that it operates a five-day hold on transactions following a deposit from a newly-linked account; withdrawals take 1-3 days, unless transferred to a different account than the one used for initial funding. There may be a small delay if deposits are recent.

If Wealthfront had been clearer about the limits of the account, Cohan says, he would not have opened one, a fact that leads him to argue he was duped.

“Wealthfront is the only institution that presents [such] ... staid, publicly-disclosed [policies] as some sort of private, classified, double-secret, counter-hacking measure,” he growls.

“[It seems] no information can be revealed at any point, lest laundering proliferate unchecked and unabated around the cosmos.”

Cohan's second request
Cohan says this was "at least" his second time mentioning Comenity's offer to get involved, "which was not addressed by Wealthfront." (Click to enlarge)

By stretching its business model beyond its core robo-advisory service, Wealthfront risked taking hits to its overall brand for any missteps.

It's a risk it had to take, says a source who is a competitor in the RIA cash-account business and prefers to remain anonymous in order to speak freely.

"There's a reason Wealthfront has had to raise hundreds of millions: they don't have a business model yet ... [and] the key to the wealth-management business has always been cash -- it's where you start."

If Wealthfront ruffled some feathers to hit $20 billion, they’ll think it a worthwhile trade-off, says Smith.

"With advisors [on a B2B basis], it’s once bitten twice shy, but Wealthfront can go out to 300 million US consumers, and if it messes up with 20, they’re not [likely to] get up on their soap box."


*The $8,500 Cohan tried to withdraw was returned to his Comenity account on July 22. The $55,000 that remained in his account was fully returned on Aug. 5. $1,800 was returned earlier, at his request, on Jul. 25, after it was first "denied by two different people, then subsequently accepted after."


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Wealthfront's unlikely tapping of Sheila Bair and Tom Curry signals likely push to gain a bank charter, analysts say

The Redwood City robo-advisor's addition of two renowned former chief banking regulators brings legitimacy and guidance that could lead to a margin-fattening bank charter and help solve the robo-advisor's problem of high client acquisition costs.

December 31, 2020 – 4:37 AM

Wealthfront cedes to four years of investors clamoring for crypto by taking on expensive third-party vendor that Betterment rules out

The Redwood City, Calif., robo-advisor turned a hard 'no' into a soft 'yes' by dealing with Grayscale and its 200 basis-point-plus fees, which its robo rival in NYC -- also without a crypto path -- finds ludicrous.

August 14, 2021 – 2:20 AM

Second Betterment exec departs as new CEO Sarah Levy orients to her first month on the job and is confronted by personnel matters

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January 19, 2021 – 6:32 PM

Jon Stein ousts himself as Betterment CEO and taps Sarah Levy, who joins an exclusive club of top women executives, with a mission -- an IPO

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December 8, 2020 – 5:27 PM

See more related moves

Mentioned in this article:

Wealthfront
Portfolio Management System
Top Executive: Andy Rachleff

Betterment, LLC
Financial Planning Software
Top Executive: Jon Stein




Greg B

Greg B

September 16, 2019 — 9:07 PM
ACH fraud is becoming a growing problem and this, not AML concerns, is likely the reason for the restrictions they have in place.
Brian Murphy

Brian Murphy

September 16, 2019 — 7:32 PM
Wealthfront is a company that never really found economically viable product/market fit with their wealth management offering. Instead they continue to look for lower cost acquisition strategies to continue driving AUM, that can bring their average revenue per client up. Unfortunately I can't see much in the way of margins on the money market fund - just a lot of likely future churn. Good luck to the team in pulling off a turnaround however.

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