Wealthfront raises a cool $20 million from VCs to pursue a big slice of a $1 trillion market

The $20m in VC must be 'other people’s money’. I can’t see how this ends well for anyone involved.

The irony. Venture Capital firms charge 2% assets and 20% of profits to their investors and then fund a RIA that charges 0.25% to handle the money made by Silicon Valley employees.

Didn’t Vanguard have this business model worked out in the 1970s? Keep track of clients index fun portfolios? True, we live in a Google/Facebook world of like and share buttons. They have enough money now to survive. Congrats on the capital raise.

So when they get to $1 billion under management, they will be taking in $2.5 million in fees, give or take? Then management wants their cut. Employees and vendors need to get paid. And the VC’s want a return on their $20 million.

At $100,000 average account size (current avg. account size is like $65K), they will need 10,000 investors, or approximately 7,500 more than they have now.

So let’s assume their profit margin at $1 Billion AUM is 20% (not likely, but let’s just say). That’s $500,000 in profit. Even at 10x profit, you are nowhere NEAR returning much to the investors. They need to be at more like $3-5 billion in AUM to make any reasonable return, which equates to 30,000+ individual investors.

I am guessing that a lot of the VC money is just “fun money” with no real hopes of making anything back. I would love to see the business plan on this.

I would also guess that much of the initial individual customer money (they’re not really “clients”) came from the investors/VC’s/management.

This wasn’t meant to rain on their parade. It was more meant to point out that investment advice in not cheap or easy. Why would someone go to Wealthfront when they could get the same exact thing for free at Vanguard?

Their white paper cites how they use quant screenings to find the best ETF’s in the market, yet Vanguard seems to be the only one they use. Where is the research out there about the 35% of mutual funds that outperform the index in long periods? I’d like to see a non-biased report.

“Advisors are of no value,” says Rachleff. That may be true for some people who have limited resources or believe that technology can substitute for human judgement. But it’s not the case for many investors who have gained experience and wealth. The affluent want advice from real people, not a computer. Even Andy Rachleff meets with his VCs face-to-face.

In truth, this is not a question of one or the other – it’s both. There are people who want no-touch and there are people who want a trusted adviser. The ideal RIA firm will offer both. It will have a very low cost “robo” solution and slightly higher cost trusted adviser solution that investors can upgrade to when they’re ready.

It’s amazing how much money will be thrown to people who have never actually managed someone’s money before. I look forward to seeing what happens with Wealthfront when the market goes south and their clients have no one but a computer to talk to.

Good discussion. Hey, I hope these VC bright boys are all right. Probably, not that east. Darn it. Linked In > advisory business? Huh?

All this sound like just more supply-driven (funds available) than demand driven. Finding and service demand is real hard. Spending money is easy.

Just read more of the article. lol I’m sure Brooke was rolling his eyes the whole time. It is really funny what these guys are saying. I’m sorry (not really) – this is completely idiotic. C’mon.

Good lord. Too many silly things to even start. The comments are good though. Do these folks even know they are in the most heavily regulated business in the world? Are the investors aware of potential lawsuits? Do these folks think they are investing in a movie or shopping website?

This is a great start to my weekend.

Some reading may laugh at Andy, but the potential is there. We at Hedgeable (www.hedgeable.com) believe we can reach $1 Trillion in assets too, and there are room for others. At $1 Trillion we would still only be half the size of Vanguard or PIMCO. The momentum is there, and trillions will be flowing away from the entrenched old school firms over the next decade.

Mike- CEO, Hedgeable

If the Fed keeps printing money, we’ll all have $1 trillion. The problem is that a Starbucks coffee will cost $1 billion! LOL

Aren’t testimonials as advertisements against SEC rules? There are 40 testimonials on their homepage.

Does anyone realize how long it took Vanguard, PIMCO, Fidelity, et.al. to reach the size they are at? Those firms, which sell to individual investors, institutions, money managers, hedge funds, and have selling agreements with virtually every broker/dealer on the planet have been around for DECADES. Selling online to 30 year-olds with $25K Roth IRA’s is not going to get you very far.

They will need the $20 m for lawsuits! Right, $T for everyone! These folks have no idea what they’re doing. These schemes have moved from the unlikely to the absurd. Apparently VCs do zero real research on the ideas they fund. Too funny.

I don’t have anything to add to the intelligent conclusions presented here. I will add this fun experiment I conducted recently. I shopped these guys an others like them to get a first hand experience. Conclusion: they don’t have a clue about what they’re doing, at least at the client level. Denial is a very potent drug. Not to mention that competing on price is a path to zero. What a waste of $20M!

VCs and Wealthfront think they are disrupting the market. But Vanguard and DFA did this literally decades ago…. The competitive advantage for Wealthfront is what — hiring someone from LinkedIn and putting an academic on your board?? Meanwhile, you are going head-to-head with firms that have brand and true distribution power, not 'like’ and LinkedIn buttons.

This is the Overstock.com of the financial industry —- oblivious to the fact that Amazon.com already exists in 3 forms in this industry —— Vanguard, Schwab & Fidelity.

The Thundering Herd and small RIA’s should take notice.

You go to their website, complete a short questionnaire, a computer generates a recommended portfolio of low cost index funds or ETFs, you transfer your money and invest in those funds – sounds like Vanguard! The only difference is that you pay an annual 0.25% toll to buy Vanguard funds do it through their website.

Here is another man vs. machine platform.
http://go.bloomberg.com/tech-deals/2013-03-19-why-you-should-consider-taking-financial-advice-from-a-computer/

While there always will be a market share for virtual “something”, as the customer market goes into the high net wealth part of the food chain (HNW’s worth $5MM and above), the needs for a relationship based services will always trump any virtual machine, at least that is my opinion.

A do it yourself market might work for HGTV, and Home Depot, but you cannot bring automation to relationship.

What you need is to build a service and support technology to help the independent adviser scale their business and relationship demands.

Just my take, but always interesting to see people try to break into financial technology in unique ways.

We can say:

- Scaling advice to a much larger level is needed. Likely government utilities will be created since life-savings are increasingly at stake. Losses in life saving become a threat to whole societies.

- Computer decision making is much better than human in most applications. The applications in medicine, etc.

- The current development model for computer solutions is based on a pretty narrow financial and VC/PE/etc. business model.

- The incentives on the VC/PE model are for fast rent-seeking, exits and arb profits. Problem-solving of paying customers is disincented. Spare the protests, let’s be honest.

So the likelihood of a real long-term, or even short term, solution is nil. The incentives are all to enriching the shareholders and exploiting the “customers” ASAP. These are usually sham companies — especially when the main shareholders cash out. That’s fine but it may take non-profit or government funding to deliver real solutions.

Also, these are complicated problems. We have a start-up project with real science and evidence basis and it is very hard to create something that really works.

Investors that are only interested in making as much money as possible – should never invest in, or be asked to get involved in, long-term problem solving. Tech or any other. Like the roll-up biz models – the incentives get all tangled.

I would say: “..always interesting to see people try to break into financial technology in (dum) ways.”