More funding for robo-advisers doesn't quell skeptics

Industry analysts have been ringing the death knell on digital advice for some time, but there are pathways to profitability

Jan 5, 2018 @ 6:23 pm

By Ryan W. Neal

Wealthfront closed yet another round of funding Thursday. Along with news reports touting the firm's $75 million capital inflow to help it develop new products for its growing client base, it inspired yet another round of skepticism from the traditional financial advice industry.

Andy Rachleff, chief executive of Wealthfront, said the funding brought in by a group led by Tiger Global Management would be "more than enough" to turn the digital wealth management firm profitable.

The robo-adviser now manages more than $9 billion in client assets, and Mr. Rachleff said Wealthfront brought in $100 million in new assets in a single day before the funding announcement.

Several industry observers took to social media to ask why the company still needed to rely on outside investments.

"If I gave you $130 million, could you build a $9.5 billion AUM RIA firm in 11 years … and still need another $75 million in capital to get to profitability? That's Wealthfront in a nutshell," said Steve Sanduski, the president of Belay Advisor, on Twitter.

"Robo-advisers out of money again," said Ross Gerber, president and CEO of Gerber Kawasaki Wealth and Investment Management, on Twitter. "Wealthfront raises $75 mil [sic] to continue to promote their under-performing portfolios and loans. They must be seeing withdrawals as young people figure out they won't make any money this way."

Wealthfront did not respond to a request for comment, but Kate Wauck, a spokesperson for the company, said via direct message on Twitter that Wealthfront is not "having a problem becoming profitable at all.

"We have a very clear path to profitability that is in the near future," Ms. Wauck said. "I think you're confusing us with other firms who spend a horrendous amount of money on marketing."

Industry analysts have been ringing the death knell on robo-advisers for some time. In May 2016, Michael Kitces, partner and director of wealth management at Pinnacle Advisory Group, wrote a blog arguing that the direct-to-consumer robo-advisers couldn't sustain due to high client acquisition and marketing costs.

(More: Startup robo-advisers grapple with client acquisition costs)

He did see that they could turn profitable if they reached a large enough scale of investors or pivoted their business model. Another digital-advice platform, Betterment, for example, has found success white-labeling its technology to RIAs, and started a 401(k) business.

Wealthfront has remained a purely digital, direct-to-consumer offering, but Mr. Kitces sees them as building an entire banking and brokerage platform for tech-savvy, self-directed investors.

"There's a size and scale where Wealthfront can be profitable," Mr. Kitces said on Twitter. "Other brokerage firms have lower revenue/AUM yields than Wealthfront's pricing and they do it."

Betterment has $12 billion in AUM and closed a $70 million round of funding in July. Joe Ziemer, the vice president of communications at Betterment, said that while the company doesn't officially comment on profitability, it isn't the company's highest priority.

Mr. Ziemer said financial services firms often have a longer runway with initial investors to build a sustainable company, and Betterment's investors understand that.

"There is an expectation that you'll continue to grow with an eye toward sustainability and achieving independence," Mr. Ziemer said. "We're not a traditional app that has rapid growth from 12 to 24 months and will have an outcome one way or the other — either a large acquisition or go public in four to five years. This just doesn't happen in financial services."

Ellevest, a VC-backed digital adviser targeting women investors that raised $34 million in funding in September added a full-service wealth management firm to its product offerings to attract larger accounts. NextCapital, a startup that closed $30 million in funding Thursday, is targeting exclusively large firms like retirement plan providers and asset managers.

"There are a lot of very smart people who still find this space very, very attractive and understand the work and the time required," Mr. Ziemer said.

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