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Homework1_CaseStudy_Wealthfront


Submitted by: Rina Niles

NOTE: As previously conveyed, I had a completed a more detailed/expansive case study on Wealthfront. Sadly, on Monday my two year old spilled coffee on my laptop. It is DOA and I lost all of my work. The below is an abridged version re-created from memory. A good (painful) reminder to use the cloud...


Wealthfront’s Twists, Turns, and Turbocharged Success

Overview and Origin

Robo-advisor Wealthfront was founded in 2007 (beta). The company formally launched in 2008 under the name kaChing and was focused on mutual fund analysis. In October 2010, the company rebranded under the name Wealthfront and pivoted to robo advising.

Weathfront’s product/service functionality, offerings, technology and positioning have evolved over the years (including through several “pivots”). Notable, differentiated offerings include:

  • tax-loss harvesting (launched in 2013)
  • 529 tax-advantaged college savings plans (launched in 2016)
  • Path, a homeownership planning tool (launched in 2018)
  • high-interest savings accounts (launched in 2019)
  • checking accounts (launched in June 2020)

1. Who are the founders of the company?

In its current incarnation, Dan Carroll and Andrew Rachleff. Rachleff co-founded Benchmark Capital in 1995, is a faculty member of the Stanford Graduate School of Business and vice-chairman of the University of Pennsylvania Board of Trustee’s endowment investment committee; Rachleff saw just how effective and important access to the best financial advice was for the endowment and that such access was not widely available (especially to individual/retail investors). Dan Carroll was a former trader who developed the initial prototype of a software-based financial advisory engine (inspired by how his parents had financial advisors that were unimpressive and that the system was not meeting their needs); after Andrew heard about the prototype, Andrew reached out to Dan and the rest is fintech history.

2. How did the idea for the company (or project) come about?

Both Andrew and Dan separately identified a profound inequality/inequity/imbalance in the quality of financial advice and investment management that people of some means (but who were not ultra-wealthy or an endowment/major asset owner themselves) received. They also saw that software/technology had not yet reached or disrupted the asset management industry, both at the level of high-end sophisticated and expensive services as well as relative to the opportunity to “democratize” access. Software could be used to disrupt the then-existing model for financial advice & financial management and be used by an underserved “mass affluent” portion of the population.

“The mutual fund industry is a $10 trillion industry that has seen no innovation for 25 years…The Internet has had no impact." -- Rachleff

3. How is the company funded? How much funding have they received?

Wealthfront remains privately-held. The company is reported to have progressed from angel investment in December 2008 to a Series E round in January 2018. Aggregate funding through to Series E is reported at approximately $200M, but it is unclear how well-capitalized Wealthfront was at inception and whether subsequent capital raises were primarily driven by substantial capital needs required to be filled through external sources or rather also (or primarily) for other reasons, such as strengthening partnerships and credibility by bringing in a curated list of new investors (and each round appears to have featured at least some of the prior investors “re-upping”). As Wealthfront’s founder was the co-founder of Benchmark, access to the best minds and the best capital would not have been difficult.

Notable investors across the reported fundraising rounds included Marc Andreessen, Chamath Palihapitiya, Marc Pincus, Alison Gelb Pincus, Marissa Meyer, Tim Ferris as well as Benchmark, DAG Ventures, Index Ventures, Ribbit Capital and in 2019, hedge fund Tiger Global Management.

Wealthfront is classified as an “Emerging Unicorn” in Crunchbase.

Business Activities

4. What specific financial problem is the company or project trying to solve?

In the early 2000s, Rachleff as a result of his oversight of Penn’s endowment fund, realized the vast majority of retail investors did not have access to the best ideas of the best investors; best-in-class asset managers would not bring in “lower upper class,” upper middle class, middle class or lower income investors as such investors would not have enough to allocate individually (giving Wealthfront the opportunity to “pool” assets of subscribing individuals)

Mutual funds available to the “masses” had high fees and were not necessarily high-performing or expected to “beat the market” and personal/human financial advisory services were not of the same quality that the top endowments or ultra-high net worth individuals received while still being expensive (and top advisors who did have lower income clients had mis-aligned incentives that made it unlikely they would focus on such clients).

Even top asset owners were not using software/automation effectively (“even they relied on manual calculations, outdated tools, spreadsheets” per Wealthfront founders)

Rachleff and Carroll believe that disintermediating and democratizing financial advisory/management services through robo-advising and software could give other investors access to the “best” advice at reasonable cost

Wealthfront’s specific robo-adviser products (available through a high-rated mobile app) are: (1) automated investment advisory services that provides access to “state-of-the-art investment advisory and portfolio management services”; (2) serving as the client’s automated investment adviser for 529 college savings accounts (which consist of an account with the sponsoring state trust fund and a related brokerage account at Wealthfront Brokerage); (3) tax-loss harvesting (“TLH”) strategies for taxable accounts that helps lowers taxes while maintaining expected risk/return profiles of the portfolio (e.g., TLH harvests previously unrecognized investment losses to offset taxes due on other gains and income by selling a security at a loss to accelerate the realization of capital loss, investing the proceeds in a security with closely correlated risk and return characteristics and thus enabling the realized loss to be applied to lower tax liability and the tax savings can be reinvested); (4) actual cash account and deposit offerings through partners; (5) freemium software-based financial planning tools and services that addresses potential future financial scenarios, including retirement, college funding and purchasing a home, provides recommendations for reaching their financial goals and links external financial accounts, including bank, brokerage, retirement, college savings, loan and credit card accounts and mortgages, in order to eliminate the need for the traditional financial planner interview that is usually required to acquire the necessary inputs to build a financial plan; (6) online financial education and learning information through their blog.

5. Who is the company's intended customer? Is there any information about the market size of this set of customers?

Wealthfront’s intended/target customer has varied over time – originally amateur and professional investors managing virtual portfolios with the company being pitched as a virtual trading platform where users could “compete” with friends/family/others (it used to be on Facebook as “Fantasy Stock Exchange” (and then being able to have portfolios managed by hand-selected “expert” (but perhaps amateur) investors) – but later Wealthfront became a way for amateur investors to have their assets “automatically” allocated for investment to selected high-end fund managers and have their assets “pooled” with other investors with similar risk/return profiles in order to gain access to these top fund managers with strong performance records who served endowments and high net worth accounts and have assets invested in ways that replicated how the assets of the wealthiest in society would be allocated – and now Wealthfront (especially through the pandemic environment) offers checking tools, “self-driving” money and autopilot suites, tax harvesting tools and other features

There have also been choices Wealthfront has had to make as to whether to continue to target “regular people” (i.e., human/individual consumers) vs. institutional opportunities (family offices, smaller endowment funds, etc).

The company has also been viewed as targeting the “millennial” generation in particular with its low-cost, fully-automated online investment platforms.

In theory, Wealthfront’s customers could include the full range of the following who have capital to invest and financial matters to manage and would benefit from advice:

  • customers with less than $1M
  • customers with $1M to $5M
  • customers with $5M to $10M
  • $10M+ customers
  • endowments
  • foundations
  • institutional investors
  • asset owners

6. What solution does this company offer that their competitors do not or cannot offer? (What is the unfair advantage they utilize?)

The core of their (unfair) competitive advantage is supposed to be software (Rachleff “software is our superpower”) – this means they would be (or need to be) better than everyone else in terms of effective automation, leveraging data, and deploying design that is human-centered and user-empowering in order to delight their customers and make issues in life that are stressful/unenjoyable at times (i.e., financial planning / managing one’s “financial life”) enjoyable, less painful, easy, joy-inducing and delightful

However earlier on, the competitive advantage was their having gotten top asset managers/financial advisors to “take & manage” the assets of lower income individuals through the Wealthfront system automatically, and Wealthfront being able to offer this service in a very low-cost, low or no fee manner without imposing a management fee on users (as Wealthfront would get a cut instead from the ultimate asset manager whose positions were being replicated) and do so in way that offered speed/immediacy/accessibility thanks to technology (i.e., no need to have an in-person or telephonic meeting with brokers/financial advisors in order to make decisions)

They used to offer free services/waiving the management fee for the first $10,000 in account size but stopped doing that for any new clients who opened their initial account after April 1, 2018 and now charge annual fee of 0.25% on the net market value of a client’s account. Fees for “human” financial advisors and asset managers are much higher. Their minimal account size is only $500 (much, much lower than minimum requirements of other asset managers). Wealthfront also states that “Tax savings worth at least 3x our annual advisory fee.”

Their founder argues as follows as to what differentiates them (with more than a hint of frustration…):

“Rachleff: One of the frustrating things to me about the fintech world is that reviews are done based on websites, not based on products. In the technology world, people used to actually buy products to review them. But in our world, they review you based on what your website says, and everybody says they do the same things. They don’t. So, for example, on the investment side, it’s really, really easy — it’s an absolute commodity — to do a diversified portfolio of low-cost index funds. But tax loss harvesting is only done by three or four firms, and by the way, they’re not all equal. There’s a radical difference in the quality of what we do on the investment side and what everybody else does. On the banking side, by the end of this quarter, no one will have more features than we do. So, things like direct deposit and getting paid two days early. Pay your bills and your friends automatically. We enable a consumer to use Venmo or their Cash App in addition to paying their bills. We offer a debit card that allows consumers to buy things and to make withdrawals from ATMs. We also have automatic check deposit, mobile check deposit, and we’ll have the ability to send checks by early October 2020. Those are sort of table stakes, but hardly anyone else pays meaningful interest on your checking balance. You have to transfer the money into a savings account. Right now, we’re paying 35 basis points on checking balances. The ability to automate the routing of money and automate finances is something that no one else has invested in.”

7. Which technologies are they currently using, and how are they implementing them? (This may take a little bit of sleuthing–– you may want to search the company’s engineering blog or use sites like Stackshare to find this information.)

  • Wealthfront uses a Ruby Rails web server that backs a client-side application built using Typescript, React, Redux and D3. Their automated testing infrastructure uses a variety of frameworks and libraries including Jest, React Testing Library, RSpec and Puppeteer. They rely on in-house solutions for feature gating, A/B tests, analytics, and continuous deployment.
  • Wealthfront has successful internal processes for developing and shipping/launching product-code and believes they have figured out how to balance multi-month new feature developments, ongoing improvements to existing features, daily deployment of code across several major projects a year and working as a cross-functional team across both client-facing and back-end roles. 2020 featured the launch of at least four major (tech) projects that were client-facing: checking features, debit cards, pay by check and mobile check deposit.
  • Android/iOS apps: Xcode, iOS SDK, Swift, Objective-C, SDK performance tools + opt, JAVA, Kotlin (each as applicable)
  • Marketing: paid digital, paid social, OLV, SEM, SEM, CRM, in-app, affiliates, etc
  • Data science / research technology includes Python or R programming; expert level SQL and intermediate / advanced statistics; visualization tools via Excel, Tableau and Shiny; machine learning (regression, classification, clustering); Scala/Spark data pipelines; etc.
  • Aspirational: the Wealthfront team is also working on a cloud-native Data Analytics Platform to manage client financial data that goes beyond simply using data for ad hoc analysis/reporting but also enables real-time “decisioning” using ML and optimization within product offerings/experience – this would require leveraging technologies in context of low latency, high throughput and optimized cost to serve
  • Engineering work references ORM technologies like Hibernate and dependency injection frameworks (Guice, Spring, Pico, Dagger)
  • Wealthfront coordinates a number of processes with the open-source project Apache Airflow project platform (e.g., “hourly and daily ETL jobs for ingestion”, Spark pipelines for computing derived information, batch processes for client and company needs/mechanisms such as movement of money to Wealthfront partner banks)
  • Testing approaches within their development process includes hosting and managing a continuous integration (CI) pipeline on Jenkins (which is what runs Wealthfront’s unit and UI test suite)

Landscape

8. What domain of the financial industry is the company in?

Wealthfront, similar to its competitors, spans multiple adjacent areas of fintech, namely: robo-advising / wealth management, institutional asset management, financial advisory services, and personal savings / checking

9. What have been the major trends and innovations of this domain over the last 5-10 years?

  • Downward pressure on asset management fees and advisory fees due to robo-advising but also other factors
  • Explosion in “passive investing,” turmoil + consolidation in asset management industry and underperformance of actively managed funds; more recently the rise of ESG/sustainability/socially responsible investing
  • Increased participation (including through 401Ks) of workers and middle class in the stock market
  • Increasing and significant variation in investing, saving and consumption practices by demographic category
  • Pandemic-related dynamics have also influenced this domain and asset management / financial advisory in general

10. What are the other major companies in this domain?

  • Standalone robo-advisors: Betterment, Personal Capital, Stash, Ellevest, Sofi Automated Investing
  • Traditional wealth managers with robo-advisors: Vanguard Digital Advisor, Ally Invest, Schwab Intelligent Portfolios
  • Blackrock (Future Advisor), Goldman Sachs (Marcus)

Results

11. What has been the business impact of this company so far?

Their main impact seems to be spurring mainstream players to adopt similar techniques and spur competition in the robo-advising arena. They seem to focus on spreading their brand through word of mouth.

12. What are some of the core metrics that companies in this domain use to measure success? How is your company performing, based on these metrics?

A key metric of success used by traditional financial advisors / asset management services is AUM (assets under management) – Wealthfront was reported to have $21B in AUM as of Sept 2019 and $20B as of October 2020. Number of clients/customers, victor/website traffic, conversion of “looks” to accounts are other metrics. Customer-specific metrics like size of account, growth rate, net deposits and other items would be useful. (I do not have these metrics for this company).

I do not have access to revenue or profits information for the company.

13. How is your company performing relative to competitors in the same domain?

Well recognized among robo-advisors, but AUM massively trails “mainstream” asset managers and competition is fierce (and growing) in their “domain”. Wealthfront sometimes outranks Betterment but appears consistently to be viewed as one of the “top 2” or (worst) “top 3”.

In 2016, Rachleff returned as CEO, replacing Adam Nash who took on the job in 2014 to guide Wealthfront in achieving product-market fit. Rachleff is believed to have returned as CEO due to concerns over increasingly intense competition. (It may be notable that Nash was later said to have invested in Cheese and supporting Cheese’s launch – Cheese is a digital banking platform focused on Asian Americans). Note my concern re competitive threat / positioning / prospects that I discuss in more depth below.

Per Wealthfront’s lastest ADV filing (March 2020), they have 212 employees and are a registered SEC investment advisor.

My concern for the company is that, while they were a “first mover” in the space, there are minimal barriers to entry and the company faces (and will continue to face) tremendous competition – on the other hand, there will continue to be many opportunities to innovate – but this is not a space where structural reasons compel a “single winner” or “winner takes all” environment so Wealthfront can presumably continue to be an attractive option for potential customers but may not necessarily “break out” or “dominate” the robo-advising or broader asset management space – if they are able to out-innovate others and break new ground in their “self-driving” concept, they should get more users. But traditional players will and are moving aggressively into Wealthfront’s “space” and there is not a real reason to think traditional players will fail or that their “fintech” competitors will not also be successful in innovating. Wealthfront will likely get buyout offers and their investors (and founders) may exit that way; their founders/leadership seem to believe that Wealthfront is simply better, smarter, faster and more innovative – and showing true leadership to revolutionize finance. Time will tell!

Recommendations

14. If you were to advise the company, what products or services would you suggest they offer? (This could be something that a competitor offers, or use your imagination!)

High-level, I recommend Wealthfront aggressively focus on new client acquisition, including through experimenting with new offerings, new business models, and new marketing approaches (social, digital, etc), while improving tech platform and human-centered design features.

  1. Expand into a broader set of asset classes – alternative investments, less liquid asset classes (since many of their customers are saving for retirement or for longer-dated goals, rather than needing immediate liquidity) and other approaches (e.g., like they recently are exploring for mortgages) – apply the original innovation (“pool” assets of smaller investors so that top fund managers would accept such assets) to other areas where democratization is needed and feasible (and linked to higher returns) and see if regulatory restrictions can be navigated and customer base further analyzes (e.g., what percentage of Wealthfront users meet the “accredited investor” definition?)

  2. Establish clear leadership in providing access to investment options and personal finance paths that are linked to ESG/sustainability/“solutions that help people and planet” to build brand trust and drive adoption/usage among target demographics

  3. Do more, faster and better with understanding their customers using AI, machine learning and any other tools/services that will strengthen relationship with client from a position of high trust but also inform new product offerings, including “free” offerings – mine linkages between services and consider partnerships with other providers to make Wealthfront more of a “one stop / “the only stop you need” for personal finance optimization

  4. There is an implicit “brand trust” focus to Wealthfront—accordingly, Wealthfront should consider the right partnerships with other third parties, including financial product providers and platforms (like they do with FDIC insured partner bank GreenDot) but also other consumer-facing enterprises (e.g., branded credit cards or debit cards or reward/marketing linkages that will enhance rather than detract from trust)

15. Why do you think that offering this product or service would benefit the company?

(see reasons above)

Note that Wealthfront leads hard into the notion of the system being rigged against the little guy / their users, that the financial industry was not designed to be fair and that Wealthfront can level the playing field. I would encourage them to test this angle / advertising / brand-building approach further – if they are seeking “Reddit-style” recognition and approaches, there are implications and downsides / potential upsides for that and ultimately they need the specific products, technology and offerings that make them the partner/robo-advisor of choice. Wealthfront also needs to be careful that when they are leading so hard and deep into the “we are the (only) ones you can trust” mindset that they have no footfaults that reveal conflicts of interest on the part of Wealthfront or create cynicism/skepticism about their business or approach. This is less a product/offering recommendation and more a cautionary note.

16. What technologies would this additional product or service utilize?

See above as to each recommendation

17. Why are these technologies appropriate for your solution?

See above as to each recommendation

Consulted Resources

[1] Form of Wealthfront Client Agreement -- Microsoft Word - Taxable Adviser Agreement (Clean Nov 2020).docx (wealthfront.com)
[2] https://en.wikipedia.org/wiki/Wealthfront
[3] www.riabiz.com
[4] FT Partners: Women in FinTech – Redefining the Future of FinTech: https://www.ftpartners.com/fintech-research/women-in-fintech
[5] Wealthfront Product Design Intern’s Perspective and Discussion of Promo Module Project: https://medium.com/@tracycai/wealthfront-case-study-product-feature-recommendation-modules-6a9ebdc924aa
[6] History of Wealthfront Funding Rounds: https://craft.co/wealthfront/funding-rounds
[7] https://vator.tv/news/2016-12-21-when-wealthfront-was-young-the-early-years
[8] Registered Investment Adviser Reports (SEC and FORM ADV): https://reports.adviserinfo.sec.gov/reports/ADV/148456/PDF/148456.pdf
[9] https://www.roboadvisorpros.com/robo-advisors-with-most-aum-assets-under-management/
[10] SEC Enforcement Press Release: https://www.sec.gov/news/press-release/2018-300
[11] Wealthfront Client Brochure: https://www.wealthfront.com/static/documents/form_adv_part_2.pdf
[12] Robo adviser lays out ambitious banking plan: https://www.americanbanker.com/news/robo-adviser-lays-out-ambitious-banking-plan
[13] Wealthfront: A Digital Solution In The Battle For Millennial Deposits: https://thefinancialbrand.com/102021/wealthfront-robo-investing-millennial-fintech-banking-transformed-podcast-rachleff/
[14] Why Wealthfront Replaced Its CEO: https://www.investopedia.com/news/why-wealthfront-replaced-its-ceo/
[15] Wealthfront Engineering / Engineering Blog: https://eng.wealthfront.com/
[16] Wealthfront website/careers/etc: https://www.wealthfront.com/
[17] FT Partners--Open Banking – Rearchitecting the Financial Landscape: https://www.ftpartners.com/fintech-research/open-banking-rearchitecting-financial-landscape

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