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In the early stages I was skeptical however with declining fees and sophisticated tax loss harvesting strategies it appears these shops add value. Curious to know if anyone is using Wealthfront or Betterment?
I had done some due diligence on these companies last year when VC money was pouring in. My quick summary is that they have over-promised and under-delivered both to customers and to investors but it is still early in the automation game for investing. They need a breakthrough product or feature to revolutionize the investment planning. Traditional RIAs don't have to sleep over them yet.
They are unlikely to be of much value to people on this forum who is not their target customer base and already know more than what these companies can offer.
Wealthfront has had a long history with several business model iterations or pivoting as it is called in startup world. Started as Ka-ching on Facebook for social investing with virtual portfolios, almost a game. People created virtual portfolios and shared with others. The platform kept track of performance.
Then they moved outside of FB to make this into a real portfolio tool. Initially , they kept the same model of having people creating portfolios in the market and people could see the portfolio and follow them. If you liked the performance and wanted to duplicate a particular portfolio and keep it synced with what the portfolio creator was doing in buys and sells, the platform allowed you to do that easily for a fee which was shared with the portfolio creator. The idea was that people who can do good portfolios and beat the markets would rise to the top and have a lot of people mirroring it.
But the predictable performance chasing killed it. One portfolio would do well for a short period and then it would underperform in a different market cycle and people were disappointed. There was no quality control and so portfolios that took a lot of risk and got lucky attracted more followers until it crashed and burned.
They pivoted to a version where the platform would create the portfolio for you and select mutual funds to beat the markets. That didn't deliver either as the portfolios could not consistently beat the markets in all market cycles. Their customers expected way too much from these portfolios.
So, they pivoted again this time with a lot of VC money. The company got a huge makeover with the primary goal being to create a good exit. Sort of like manufactured California wines which is more industrial and chemical engineering to create a product that sells than the art of wine making. I believe one of the VCs himself became the CEO.
The key to a good exit was to get a huge number for AUM for the platform. As much money was spent on marketing as on technology. They got rid of all active funds, selected a few low cost index ETFs. They hired a strong team of names including Burton Malkiel of Random Walk fame as an advisor to leverage him and the efficient frontier buzz word that could be marketed.
Their chosen audience was the newly minted rich from the startups who liked the technology aspect over traditional financial planners who all wanted 1-2% fee to manage their new money. Wealth front promised to do this for a fraction. This audience would also help them increase their AUM at a faster pace for their exit than getting the money a few tens of thousands at a time.
They tried to come up with things that technology could do and provide value over human advisors but other than the tax loss harvesting that was relevant to the chosen audience, they really haven't innovated anything new or of much value. Their audience was also smarter than they thought. Many opened an account with less than $10k for the free portfolio management to try it out and didn't increase it to pay a fee and/or duplicated that portfolio for themselves at Fidelity or Schwab without having to pay a recurring fee on AUM.
The basic problem was their audience did not like the concept of a recurring AUM based fee for the value they received, still had to use financial planners for whole life planning of which portfolio construction is just a small part. So, they are kind of stalled without enough AUM to get a good exit and burning VC money (still I think) as the low fees generated wasn't sufficient to pay their bills but enough to keep them going with hopes.
Meanwhile, the competition is coming in from the RIA side with vendors trying to equip the RIAs with technology so they can scale up and offer more personalized services at lower cost than they did before. Large pools of advisors are being created sharing a technology platform to offer cost-effective services. Too soon to say which one will win out. RIAs have an embedded customer base already but with too many aging advisors that aren't willing to adopt technology quickly, don't want to perturb the AUM based fee structure especially for the mass-affluent target market.
The whole thing is ripe for disruption with technology but the entrenched and often incestuous financial advice/planning industry is a very difficult industry to disrupt. Meanwhile, these online companies are scrapping with each other for AUM as the total money coming in has pretty much stalled. The shrill voices heard in this linked article is their frustrations coming through.
Comments
They are unlikely to be of much value to people on this forum who is not their target customer base and already know more than what these companies can offer.
Wealthfront has had a long history with several business model iterations or pivoting as it is called in startup world. Started as Ka-ching on Facebook for social investing with virtual portfolios, almost a game. People created virtual portfolios and shared with others. The platform kept track of performance.
Then they moved outside of FB to make this into a real portfolio tool. Initially , they kept the same model of having people creating portfolios in the market and people could see the portfolio and follow them. If you liked the performance and wanted to duplicate a particular portfolio and keep it synced with what the portfolio creator was doing in buys and sells, the platform allowed you to do that easily for a fee which was shared with the portfolio creator. The idea was that people who can do good portfolios and beat the markets would rise to the top and have a lot of people mirroring it.
But the predictable performance chasing killed it. One portfolio would do well for a short period and then it would underperform in a different market cycle and people were disappointed. There was no quality control and so portfolios that took a lot of risk and got lucky attracted more followers until it crashed and burned.
They pivoted to a version where the platform would create the portfolio for you and select mutual funds to beat the markets. That didn't deliver either as the portfolios could not consistently beat the markets in all market cycles. Their customers expected way too much from these portfolios.
So, they pivoted again this time with a lot of VC money. The company got a huge makeover with the primary goal being to create a good exit. Sort of like manufactured California wines which is more industrial and chemical engineering to create a product that sells than the art of wine making. I believe one of the VCs himself became the CEO.
The key to a good exit was to get a huge number for AUM for the platform. As much money was spent on marketing as on technology. They got rid of all active funds, selected a few low cost index ETFs. They hired a strong team of names including Burton Malkiel of Random Walk fame as an advisor to leverage him and the efficient frontier buzz word that could be marketed.
Their chosen audience was the newly minted rich from the startups who liked the technology aspect over traditional financial planners who all wanted 1-2% fee to manage their new money. Wealth front promised to do this for a fraction. This audience would also help them increase their AUM at a faster pace for their exit than getting the money a few tens of thousands at a time.
They tried to come up with things that technology could do and provide value over human advisors but other than the tax loss harvesting that was relevant to the chosen audience, they really haven't innovated anything new or of much value. Their audience was also smarter than they thought. Many opened an account with less than $10k for the free portfolio management to try it out and didn't increase it to pay a fee and/or duplicated that portfolio for themselves at Fidelity or Schwab without having to pay a recurring fee on AUM.
The basic problem was their audience did not like the concept of a recurring AUM based fee for the value they received, still had to use financial planners for whole life planning of which portfolio construction is just a small part. So, they are kind of stalled without enough AUM to get a good exit and burning VC money (still I think) as the low fees generated wasn't sufficient to pay their bills but enough to keep them going with hopes.
Meanwhile, the competition is coming in from the RIA side with vendors trying to equip the RIAs with technology so they can scale up and offer more personalized services at lower cost than they did before. Large pools of advisors are being created sharing a technology platform to offer cost-effective services. Too soon to say which one will win out. RIAs have an embedded customer base already but with too many aging advisors that aren't willing to adopt technology quickly, don't want to perturb the AUM based fee structure especially for the mass-affluent target market.
The whole thing is ripe for disruption with technology but the entrenched and often incestuous financial advice/planning industry is a very difficult industry to disrupt. Meanwhile, these online companies are scrapping with each other for AUM as the total money coming in has pretty much stalled. The shrill voices heard in this linked article is their frustrations coming through.
It needs an Elon Musk to totally change it.