News that robo-adviser
Wealthfront's valuation dropped was read by many in the financial advice industry as the writing on the wall for direct-to-consumer digital advice startups.
According to Bloomberg News, citing unnamed sources, the $75 million Wealthfront raised in 2017, led by Tiger Global Management, valued the company at $500 million. Just three years before, the robo-adviser was valued at $700 million.
That news came out just a month after Wealthfront made the controversial decision to
implement a risk parity strategy using an in-house mutual fund, backtracking on a public stance against digital advisers offering proprietary investment products.
"Ouch. It was actually a down round," said Michael Kitces, partner and director of research at Pinnacle Advisory Group,
on Twitter. "And then they immediately pivoted to offer more 'profitable' proprietary products."
"Ouch indeed,"
responded Jeff Marsden, the chief product officer of Xtiva Financial Systems. "They have lost the narrative. Capital strategy driving business strategy is a massive red flag and frequently the death bell in the distance."
Greylock Partners, a venture capital firm that had previously invested in Wealthfront, declined to comment. Neither Wealthfront, Tiger Global Management nor any of the robo's other VC backers responded to requests for comment.
Other investors aren't sure what to make of Wealthfront's supposed drop in value and what exactly it means for other robo-advisers.
Steve Lockshin, an early investor in Betterment who has since divested his stake, said he wasn't surprised to see a digital adviser's valuation take a hit, but disagreed that it was any sort of death knell for Wealthfront.
(More: The dealmakers financing top adviser technology)
"I don't know if [investors] are losing their patience. This is the first down round we've seen," Mr. Lockshin told
InvestmentNews. He added that Wealthfront is probably getting hit a little harder because of its decisions to remain purely direct-to-consumer and offer risk parity, but Mr. Lockshin believes all of the robos are over-valued.
Another venture capitalist, Nisa Amolis, cited the same reasons for why the investing community may be souring on robo-advisers.
"[Wealthfront] took a risk parity strategy when they were supposed to be passive," Ms. Amolis said. "There is much more competition now as
Charles Schwab and Fidelity have similar offerings."
The competition from incumbent firms has contributed to slowing user growth, Mr. Lockshin said. Now the robos are in a tough spot: too big to get acquired, and too small to go public.
"As a buyer, there is no fundamental reason I would pay that price, which is why I sold my Betterment shares," he said.
Mr. Lockshin still uses Betterment for Advisers in his RIA firm, AdvicePeriod, and analysts said this could be the revenue diversification needed to uphold Betterment's valuation.
(More: Betterment to let humans customize robo portfolios)
Scott Smith, the director of advice relationships at research firm Cerulli Associates, said the stories surrounding Wealthfront are proof that the market is favoring a hybrid advice approach. While the number of people who want a purely digital advice platform could grow over time, the majority of assets are still held by people over the age of 40 who want human assistance with their financial decisions.
Mr. Smith said many of the basic assumptions of the direct-to-consumer robo-advisers simply haven't worked out. According to Cerulli's research, most people are satisfied with their current advisory relationships, people are not becoming more self-directed, and few (only 3%) of investors think the fees they pay for advice are too high.
Will Trout, the head of wealth management research at Celent, agreed that the market seems to agree on the value of the hybrid model for now, but doesn't think things will necessarily stay that way.
"Looking forward, I admire Wealthfront for sticking to its B2C guns," Mr. Trout said in an email. "I believe this tenacity will pay off in the long run as the advisor community ages out and there aren't sufficient new advisors to replace them AND as coming generations get more and more comfortable with a fully or nearly fully automated delivery model… This is the way the world is heading.
"So I don't think the VC community has thrown in the towel, I just think they are more sanguine. Keep in mind that it took Amazon years to hit its stride and that the path to profitability was hardly direct."
As for Betterment, the company says it isn't experiencing any headwinds at all.
"We are adding new deposits at a record rate. 2018 is off to an incredible start in terms of new customers joining Betterment and existing customers adding assets," said Betterment vice president of communications Joe Zeimer. "We are well-capitalized and have supportive investors that know the time horizon to build a financial services company is longer than other areas within technology."
He added that going public remains the company's goal, but Mr. Lockshin is skeptical about how realistic that is.
"The question is how and when and at what price," he said, adding that Betterment would need to show significant growth in either users or assets to meet its valuation. "No RIA of that size has spent anywhere near that amount of money in development, and they tend to charge multiple higher fees."
