|Wealthfront, A Potentially Disruptive Online Wealth Management Solution, Is Funded By Silicon Valley Bigshots And Competes Against Advisors|
|Friday, December 02, 2011 03:01|
Wealthfront is the latest in a series of incarnations of a wealth management platform funded by major Silicon Valley investors including Netscape founder Marc Andreessen and Jeff Jordan, former president of PayPal. And with each new incarnation, Wealthfront is learning from its mistakes and refining its business model and wants to become a competitive threat to advisors.
Founded in 2008 with more than $10 million in venture capital, according to TechCrunch, Wealthfront’s management team includes veterans of eCommerce and university endowments. Partners at Benchmark Capital, Index Ventures, and Kleiner Perkins Caufield & Byers are among the original investors. The company was originally called kaChing.
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In December 2009, Andrew Rachleff, a general partner at venture capital firm Benchmark Capital, one of the VCs originally backing the company, was named President and CEO. Rachleff, a lecturer on entrepreneurship at Stanford University, his alma mater, has overseen a major strategic shift in direction.
Till now, Wealthfront’s investment offering mimicked portfolios offered by separate account money managers and, thus, provided access to SAMs with low minimum investments. Investors paid Wealthfront between 50 and 200 bps depending on the managers used.
Today, Wealthfront phased out that business model and replaced it with a new investment product and an imaginative new fee structure.
According to the firm’s ADV, management of the first $25,000 in assets is free, and you pay 25 bps on assets above $25.000.
I’ve got a lot of questions about the business model and tried calling Rachleff and his PR firm at several different phone numbers this morning, but have not heard back from him yet.
To me, Wealthfront seems to have potential to turn into a disruptive force in the wealth management business. Here’s why.
Wealthfront has money. Benchmark Capital, where Rachleff’s a partner, has invested in more than 150 startups and manages nearly $3 billion in committed capital. Investments include AOL, eBay, Ariba, Juniper Networks, Red Hat, MySQL, OpenTable, Second Life, Yelp, Inc., Zillow, 1-800-Flowers, Ebags.com, Friendster, Palm Computing, and Seeking Alpha.
Wealthfront’s made mistakes but keeps refining its business model and trying again. It’s no wonder Rachleff lectures at Stanford on entrepreneurship; great entrepreneurs make mistakes and keep coming back and fixing them. That appears to be what Wealthfront is doing.
kaChing was just a first attempt at a wealth management platform by this group of Silicon Valley investors. According to GIGaom, kaChing offered investors access to managers that normally required a $1 million investment at just a $3,000 minimum and kept 25% of the investment manager's fee. In another incarnation reported on by TechCrunch, kaChing targeted mutual fund managers.
After Rachleff came, Wealthfront changed its name and he today essentially jettisoned Wealthfront’s existing solution for investors, called Money Manager Model Portfolio Service. Today’s announcement said that only current investors will now get access to that program; all new investors on the Wealthfront platform will invest in the new, much less expensive platform, which costs just 25 bps on assets of more than $25,000.
Ingenious fee structure. 25 bps is incredibly low , and free is even lower. Free means you can do some social good by giving really new investors a free way to access professional money management. But one day those really new investors will be grown-ups with real wealth and Wealthfront will have a foot in the door with them.
But the real genius of free is that wealthy investors can try out Wealthfront for free. If you have a few million dollars, there’s almost no additional risk to putting $25,000 on Wealthfront to try it out. If Wealthfront starts reporting that many of its clients are putting $1 million or two on its platform, then it becomes a competitive threat to independent financial advisors—even the group often referred to as “the profession.”
Great Spiel. “Wealthfront's unique web-based Precision-Investing Platform is built around the well-known model of Modern Portfolio Theory (MPT),” says Wealthfront’s website. “Nearly every academic and investment professional believes MPT is the best approach to manage an individual's portfolio, but historically, rigorous MPT-based financial advice has only been available through high-end financial advisors. These advisors often require account minimums in the millions, and charge fees of 1% or higher.”
“We’re democratizing access to the benefits of MPT with a service that is simple, cost-effective, financially rigorous and accessible to any investor,” the company website adds.
Marketing Against investment Professionals. A detailed explanation of Wealthfront’s investment methodology is entitled, “The Financial Advisor For The New Generation.”
According to the brochure, “Wealthfront, an SEC registered investment advisor, offers an online service that makes it possible for everyone to access sophisticated financial advice. Our unique Precision-Investing Platform pinpoints your risk tolerance to recommend a precise mix of ETFs to maximize your expected return for your specific level of risk and then periodically rebalances your investments whenever market changes move your allocation away from your risk tolerance level.”
To advisors building portfolios using low-cost DFA and other index funds or ETFs, the methodology will likely sound familiar.
A post on Wealthfront’s blog today, entitled “Introducing The First Online Financial Advisor Built In Silicon Valley For Silicon Valley,” throws down the competitive gauntlet.
“Six months ago, we started hearing complaints from our Silicon Valley-based customers about the wealth managers lined up in their lobbies,” says CEO Rachleff’s blog post today.
“These 'suits' were taking advantage of the new wealth being created by the surge in IPOs. But our friends in technology companies didn’t trust the financial advisors, because of their high fees and biased advice," adding, “They started asking us if we could manage their entire portfolios in a quality way, but without all the costs.”
Rachleff told TechCrunch Wealthfront was today rolling out its platform to the “tech community, appealing to professionals from the tech communities who favor doing everything online, and are looking for ways to have their new wealth managed for far lower fees.” That’s smart marketing on two levels. Firstly, Silicon Valley geeks are early adopters of online wealth management. Secondly, coverage by the tech press of wealth management apps is naive.
TechCrunch and GIGaom reporters are great at covering technology but don’t know how asset managers charge retail investors. That’s why TechCrunch today totally missed the big story here: the fact that Wealthfront could be incredibly disruptive to the wealth management advice business because of its fee schedule—as in FREE. (Ironically, it is a free service best-suited for Occupy Wall Street types.)
Before advisors get too worried about Wealthfront and others of its ilk that are sure to follow, remember that really smart Silicon Valley bigshots have failed so far in trying to reinvent the wealth management business online. In fact, Marc Andreesen, one of the original investors in Wealthfront, cofounded Netscape with Jim Clark, who in 1999 started myCFO.com, which was supposed to be a revolutionary new wealth management system. That platform is still alive but never lived up to its swagger. It eventually was purchased by a bank and turned into a less ambitious advisor platform.