Wealthfront CEO Adam Nash delivers a practiced set of rhetorical questions as we discuss the $64 million funding round his company recently closed. “What if this is the right time? What if the millennial generation really is big enough to drive a change in financial services? What if, like Charles Schwab 40-years ago, this is a moment when another multi-trillion dollar business gets built?” Technically, Nash is telling me why Spark Capital Growth’s Jeremy Philips decided to lead Wealthfront’s fourth round of funding now, even though the automated-investment advisor claims to have a $100 million cash pile and to not have been looking for new money. Yet he might as well be explaining why so-called robo-advisors have been making so much news of late.
A day ahead of Wealthfront’s October 28 announcement came word from financial bigwig Schwab that it will launch its own automated advisory service in the first quarter of 2015. On October 29 digital money management startup Personal Capital disclosed a new $50 million round led by Corsair Capital. (Personal Capital has now raised $109 million – second only to Wealthfront’s $129.5 million.) Later that week Sig Fig launched a new income generating tool for retirees and Betterment launched a feature that lets users model tax bills before making a withdrawal or allocation shift. On top of all that are rumors that other big players will get into the game soon.
Clearly, the automated investment advice industry is booming. But what does it all mean for the future of your money?
Nash predicts that in five to ten years nearly every investor will be using an automated investment service in some way. Whether you believe that or not largely depends on how you define automated. Nash sees it this way: decisions about diversification, rebalancing and dividend reinvestment will be made or checked by software. “The idea that a human would make some of those decisions without checking with a computer first is going to seem antiquated,” says Nash.
As Grant Easterbrook, an analyst who tracks Wealthfront and more than 200 other financial tech startups for Corporate Insight, quips, “It is hard to imagine the Walton heirs using Wealthfront in five years.” Aging retail billionaires aside, Easterbrook, venture capitalists and increasingly the traditional investment advice industry agree with the spirit of Nash’s assessment.
There is a sense of inevitably to Schwab Intelligent Portfolios, the firm’s name for its automated offering. Robo-advisors have attracted a large share of the more than $1 billion venture capitalists have plowed into consumer facing financial technology during the past three years. In addition to Wealthfront's and Personal Capital’s sizable war chests, there’s Betterment’s $45 million in funding and SigFig’s $30 million. According to Easterbrook, in three months this summer online advisory services grew assets under management 36.5%. Today Wealthfront alone manages more than $1.6 billion in client assets with others quickly approaching the three-comma mark. Vanguard began testing an offering earlier this year (officially, it hasn't been launched yet).
At the same time the rise of the tech savvy, recession weary and massive Millennial generation has laid bare the weak spots in an industry that has long catered primarily to rich and near-rich. “Schwab Intelligent Portfolios addresses a growing demand for affordable, objective, sophisticated and convenient investment advice,” explained Schwab CEO Walt Bettinger in a press release.
That is not to say the broke-and-born-after-1980 set are the only folks attracted to robo-advice or that Schwab is wanting for clients. “We have $2.5 trillion, trillion in assets at this firm,” says Naureen Hassan, the Schwab senior vice president leading the online advice project, repeating “trillion” to emphasize that the company has clients across generations and the net worth spectrum.
Shortly after Schwab announced its planned service, Hassan was looking at the list of people who had asked for more information. Among 2,400 or so names (the list has since grown to 5,000) she spotted an old friend from her first job as a McKinsey & Co analyst. He is now a partner in private equity and has used Schwab’s do-it-yourself tools to manage his investments for two decades. Hassan gave him a call assuming he had a stake in a competing service. “No, I am an interested client,” he told her. “I want a diversified portfolio. I don’t have time to rebalance. I don’t have time to do all the tax loss harvesting. I’m really excited about this.”
Time and money are twin pain points for most individual investors. By letting robots take on the grunt work robo-advised investing takes less time than managing your own money. The 0.15% to 0.5% of assets fee charged by most robo-startups is dirt cheap compared to the 1% or more human advisors typically charge. Schwab is taking cost cutting even further by charging no advisory fee, no commissions and no account service fee. Schwab will make money when its algorithm places clients into Schwab ETFs or into an ETF whose provider Schwab has a revenue sharing agreement with (the software will be brand agnostic). The company will also make money on any cash in the portfolios which will be placed in FDIC insured products. The logic also follows that eventually some clients will outgrow algorithms and turn to Schwab’s other offerings. “It is a long term play. Assets are so sticky,” says Easterbrook, the startup analyst.
“The objective here is to grow the pie, to make the number of people who are getting advice, who are making good investment decisions bigger. Not to take share from the people who might be completely happy with their personal financial advisor already,” says Hassan. “It is really about those under-served.”
Wealthfront was built out of the ashes of Ca-Ching, an ill-fated marketplace aimed at transparently linking advisors and clients. Earlier this year Nash explained that the earlier company’s slow growth taught the founders (Nash came on later) that people weren’t looking for ways to connect with existing advisors, “What people really wanted was a simple, transparent and low cost way to take care of their long term investments.”
The current company grew quickly from there. The service launched in December 2011. Ten months later came tax loss harvesting tools, asset location services followed shortly after that and in summer 2013 they rolled out Wealthfront.org for charities. This year brought single stock diversification for Twitter and Facebook employees as well as Wealthfront for the workplace with Google, Palantir and the San Francisco 49ers.
Nash won’t share “the future roadmap” (“blame it on the fact that I am a former Apple employee”) but says the new money will allow Wealthfront to accelerate ideas and act now instead of in three years or more.
“We realized that if we raise that capital now it sets the company up perfectly for the thing that we want most – which is to not have to worry about financing, to be large and independent.” In a way he is arguing that the company is practicing what it preaches to its young customers – sock away funds now so you can live large later.
While Wealthfront promises new innovations are coming soon, more recent strides have come from competitors.
Millions of people invest with the primary goal of generating income, especially retirees and near retirees. When SigFig CEO Mike Sha and his team looked into how income seekers are actually investing (SigFig tracks about $300 billion dollars in assets and manages a small fraction of them) he found some park their money in cash or bonds, earning little in the current low interest rate environment. Most bought dividend stocks but usually three or less names. Dividend payers can provide a meaningful yield but come with equity level risk meaning diversification is key. “We think that technology can help all those folks get a much healthier portfolio at a much lower cost,” says Sha.
SigFig's Diversified income product uses eight asset classes to target a 4% yield, but with less volatility than popular dividend stocks like Apple, Ford and Exxon Mobil. Like with its asset management product, maintenance such as rebalancing is handled by computer. The service costs 0.5% annually.
As for the big investing rounds and big entrants into the space, “I think a rising tide here is going to lift all ships,” says Sha. “The fact that big trusted companies like Schwab are doubling down and offering products like this is going to create trust and credibility in the market and in the minds of consumers that this is a good way to have your money managed. This is not some kooky way.”
