Wealthfront was created around the new wave of investors in the market: millennials. Andy Rachleff found that a large portion of the money floating around Silicon Valley was sitting idle in bank accounts, as millennials were skeptical of active management post-2008, but also frustrated by an ultra-low rate environment.
Founded in 2011, Wealthfront’s business model is simple – they offer cost-efficient portfolio management to the masses, and they monetize that through a flat fee (25bps/month on your account balance less the first $10,000 and any bonuses from referrals). They aim to create a clean user experience, eliminate excess fees and still provide valuable investing options. With an experienced team and a compelling investment plan, Wealthfront has raised $129.5mm in five funding rounds, most recently valued at $700mm in 2014 on a $64mm investment led by Spark Capital . The service has flourished ever since, hitting $2bn AUM in less than 3 years.
This success is largely due to the confluence of their business and operating models, which has led to accretive product innovation and organic sales growth. The factors behind this can be distilled into three major categories:
The Platform: The App, The Website, The Blog
Once you enroll in Wealthfront, you have access to the full platform immediately. That means you can track your portfolio via the web or an app on your phone/tablet. With over 60% of their clientele under 35 , this is a critical part of making the user experience as streamlined and transparent as possible. Wealthfront also manages an active blog, to engage the community and discuss topical economic and market questions. Here, the company continues to educate their audience, with posts ranging from product exploration (“Tax Loss Harvesting For Everyone”) to millennial-specific personal finance (“Optimizing Your MBA Financial Plan”). Such informational posts keep the company relevant and tend to double as free marketing, as users will post or share them with friends.
Born of the Silicon Valley tech boom, Wealthfront works closely with tech giants and start ups to create the ideal product for its target audience. First, Wealthfront partnered with Palantir and Google to provide an integrated alternative for employee 401(k)s. This pushed the company to create APIs which could easily interface with different employers. Now, all users can roll their 401(k) into Wealthfront, an additional source of revenue. Next, after extensive conversation with employees at Twitter, Wealthfront launched the single stock diversification service, a way for employees to strategically sell company stock through their accounts. These nuanced features continue to differentiate Wealthfront in the financial advising sphere, provide them with additional revenue streams and further align them with the millennials they aim to please.
Software Scales Faster Than People
Traditional advisors charge 1-3% annually , as each advisor must spread revenue from a limited number of accounts over a fixed salary, constrained by man hours. Wealthfront can afford to manage your money at approximately 1/8 of the cost, with software and ~100 employees running the show. Their software can service an unlimited number of clients at a fixed cost, implying the incremental cost of each account is marginal. This model is well-aligned with the company’s goal to democratize portfolio management, and has allowed them to differentiate themselves as a consistently low cost advisor. Additionally, Wealthfront can then pool client funds and replicate the account size needed for private wealth management services, thus allowing retail investors to gain access to more savvy investing techniques such as tax loss harvesting and direct indexing. Thus, scale allows for enhanced offerings, begetting more scale and utilizing their competitive advantage: software.
“We’re not very concerned about the large companies being able to keep pace … they simply can’t innovate and deliver features fast enough. Instead, we’re focused on defining a better way to invest for this generation”
-Adam Nash, Wealthfront CEO