Wealthfront has 'best shot' to remain leading digital disruptor: Forrester

Report points to low-cost online platform, Millennial market, $1 billion in AUM

Sep 17, 2014 @ 1:58 pm

By Joyce Hanson

Low fees, fast asset growth, word-of-mouth marketing and a strict focus on Millennial investors have made Wealthfront the fastest-growing digital investment platform, according to a new Forrester Research Inc. report published this week.

“Having looked across many of these digital disruptor startups, especially in the asset and wealth management space, I concluded that Wealthfront was the strongest player and had the best shot at emerging as a substantial player in retail financial services,” said report author Bill Doyle, a principal analyst at Forrester.

“They've got the right target market, Millennials; they've got a product that fits Millennials; they've got low costs because their solution is entirely automated and most of their growth comes from referral marketing,” Mr. Doyle said.

But in a managed account industry measured in trillions of dollars, Wealthfront is still tiny, having reached $1 billion in assets under management this year, two and a half years after its founding, Mr. Doyle wrote in his report.

“And the odds are stacked against any single disruptor: Most fail,” he wrote.

(More: Wealthfront deal with 49ers is a big marketing score)

Andy Rachleff, Wealthfront's co-founder and executive chairman, said AUM stood at $1.42 billion as of Aug. 31, thanks in part to the firm's annual advisory fee of 0.25%. The firm currently employs a staff of 36.

“Bill Doyle was the first person in the analyst community to recognize that we are solely focused on Millennials and not at all trying to take business from advisers, but are rather trying to serve young people who cannot afford the account minimums associated with traditional financial advisers,” Mr. Rachleff said.

The Forrester report quotes Mr. Rachleff as saying that Millennials' investible assets will eventually overshadow those of baby boomers and grow to $7 trillion in 2018 from $2 trillion today.

Grant Easterbrook, an analyst who covers automated advisory startups for research firm Corporate Insight, said Wealthfront and its online rivals such as Betterment and Jemstep Inc. see wirehouses and discount brokerages as fair game.

“It's a long-term play,” Mr. Easterbrook said. “You can serve clients with a scalable online-only product and grow with them. Wealthfront is gathering assets, and it can be lucrative long term because assets are sticky. You can develop more sophisticated services as those investors grow older and their needs become more complex.”

It remains to be seen which of the online advisory startups remain in business, he added.

“Some will be fine. I'm not saying they all will fail, but time will tell,” Mr. Easterbrook said. “They haven't gone through a market correction. A big part of an adviser's job is handholding. When a market goes down, there's an emotional element, and a lot of money leaves the market. It's hard to solve the problem of human emotion in investing as an online-only service.”

In addition, he said there's room for improvement in the online risk assessment questionnaires used by Wealthfront and other automated investment services. The questions asked of consumers about the global markets and economy “don't mean much to the average person.”

Mr. Rachleff countered that Mr. Easterbrook doesn't see what's behind the curtain in terms of the behavioral science used in shaping the risk questions. He added that Wealthfront's Millennial consumers are “voracious readers” with a good understanding of technology and finance.

Andrew Rudd, chairman and chief executive of Advisor Software Inc., said Wealthfront, which is a Palo Alto, Calif.-based registered investment advisory firm, may be a technological path-breaker, but it's following the typical sort of niche strategy that many traditional RIAs follow.

“Their strategy is geographic. It's Silicon Valley,” Mr. Rudd said. “Through their connections and location, they've popularized their capabilities to the emerging wealthy of Silicon Valley. Clearly, the concepts and tools of digital marketing there are well known and practiced.”

Lowell Putnam, 32, co-founder and CEO of online data-aggregation startup Quovo Inc., said Wealthfront's decision to chase Millennial investors is smart because they are one of the most poorly tapped markets in financial services.

“The incumbents have tried to reach out to people of my generation but without much success,” said Mr. Putnam, who is the great grandson of George Putnam, founder of the Putnam Funds.

The challenge for Wealthfront, Mr. Putnam said, will be the cost of acquiring customers.

“One billion in AUM is a great start, but you have to gather assets, and the cost of the acquisition of customer assets is notoriously high in this industry,” Mr. Putnam said. “Financial products are sold rather than bought. Young people don't wake up and think about how to spend money on retirement. It's not a tangible service so it's not front of mind, especially not for people my age.”

Mr. Rachleff said he agreed with Mr. Putnam on principle, but that such costs of acquisition don't apply to Wealthfront.

“A huge percentage of our clients join Wealthfront through invitations from our clients, who invite their friends to join,” he said.

0
Comments

What do you think?

View comments

Recommended for you

Featured Research

The 2015 InvestmentNews Adviser Technology Study

This in-depth study provides a blueprint for the industry, providing actionable information to advisers, along with the latest solutions to help them drive profitability, efficiency and growth for their firm.

Latest news & opinion

SEC slaps Lockwood with $200,000 fine over unseen trading costs to clients

Clients were forced to pay fees in addition to the usual wrap charges, the regulator maintains.

Gotcha! 10 lessons from brokers gone bad

These cases show why regulators nabbed reps and firms, and how to avoid their fate.

Tax-credit investigation may trip up Wells Fargo

Justice Department is investigating bank's dealings in tax credits for low-income housing, sources say.

10 biggest boomtowns in America

These metro areas are seeing the biggest influx of people, work opportunities and business growth.

SEC ponders creating video to help investors decide between investment adviser and broker

Chairman Jay Clayton has suggested the host on the video would deliver similar information as conveyed on disclosure Form CRS.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print