"We’re here because more people across the economic spectrum deserve to live secure and rewarding lives."
Wealthfront is an automated investment service that utilises algorithm and machine-driven financial planning and assessment to assist in goal planning, automatic trading and portfolio management for its extensive list of clients.
Founded in 2008 by Andy Rachleff (CEO) and Dan Carroll; Wealthfronts origins stem from Rachleff's belief in the need to "democratize access to sophisticated investment products". Following the global financial crisis of 2008, the pair merged philosophy and technology in an effort to even the playing field for investors with low capital that were not receiving the attention they deserved from traditional (human governed) methods of financial advice. In 2012 the company began tax-loss harvesting for clients that could provide more than $100,000 USD. The company quickly amassed 97 million in assets and had grown by 450% by 2013. As of 2020, Wealthfront now holds 24 billion dollars of AUM (assets under management). As the company has progressed it has gone under some drastic changes such as adjusting to a minimum investment of $500 for new customers, a new CEO and a negotiation for UBS to purchase Wealthfront closing a $1.4b deal indicates an uncertain future for the company.
The use of robo-advising, algorithm-driven smart portfolio management and advising aims to bridge the gap between clientel that can provide hundreds of thousands of dollars in assets and those that are willing to invest small amounts in the development of a portfolio. The utilisation of these advanced technologies discriminates far less than a human advisor, who as stated on Wealthfront's website "...make 90% of their revenue from the top 20% of their clients." And are therefore inclined to favour clients with higher investments.
"Financial institutions should target under-diversified investors with robo-advising tools, whereas more sophisticated investors and more diversified investors might display lower fee-adjusted performance after using robo-advisors" - Francesco D’Acunto
There is mounting evidence to suggest that robo-advisors are better suited to new or inexperienced investors/traders as they do not enter the market with experience or knowledge to diversify and manage there portfolio effectively and can benefit greatly from the capabilities of auto-investment and customisation.
By offering a 0.25% advisory fee annualy Wealthfront appeals to investors from all financial situations. For example an investment of $10,000 would only cost about $13 for an entire year of portfolio management. The company now provides services for 480,000+ clients according to Wealthfronts webpage.
Wealthfronts success stems from its advantage over competitors for multiple reasons. These include the extremely low advisory fee mentioned above (one of the lowest in the industry), expert consulted investment strategies, tax-loss harvesting savings and minimal effort on behalf of the investor. The client can even opt for higher risk investing and the allocations of there assets are fully customisable in a clean and well developed interface for customers.
The software developed for Wealthfronts services was built upon JavaScript, C++, React and more. The data necessary to develop optimal algorithms is sourced from Google Analytics and Twilio SendGrid.
Wealthfront belongs to a Financial Technology domain known as "Robo-advisors". Robo-advisors were first launched in 2008 by Jon Stein's "Betterment" during the global financial crisis. Thus, with nearly two decades of development and innovation robo-advising is still a new player in the world of finance that has great potential to grow as financial investments are becoming more diversified with introduction of digital assets. Elements such as Cryptocurrency, NFT projects and emerging digital assets/technologies that will be developed in the near future.
Robo-advisors have become increasing popular because they offer personalised and proven results. The last decade has seen the introduction of "hybrid" financial services that offer one-off interactions with a financial planner or an ongoing relationship with a human advisor in addition to the robo-advisor depending on the service. Trends that remain consistent however are both positive and negative with consumers as a whole. While clients trust that machine executable trades are able to maximise returns on investment and are a safe long-term tool for automatic portfolio management.
“Even if a computer program is excellent, it doesn’t necessarily identify and draw out all of the information that’s relevant to somebody’s financial situation. A human advisor is more flexible and often better able to do that.” -Jill E. Fisch
Speculators and critics of robo-advising hold a stance that machine learning is not at a capacity capable of factoring world-wide real-time events such as political turmoil, crisis and events. Or that they can effectively react to the publics perception of outlandish remarks or actions made by figureheads of companies worth millions of dollars.
Competitors to Wealthfront include:
- SigFig
- Interactive Advisors
- Betterment
- Personal Capital
- M1 Finance
- Merrill Guided Investing
The company, now servicing an extensive clientel of over 480,000 members is under the management of assets attaining more than 24 billion dollars as of 2020. Being regarded as one of the most successful robo-advisory companies in the world it has proven itself (and the robo advisory industry as a whole) to be an effective, equitable and sustainable approach to portfolio management for those willing to provide a little or a lot to there investment portfolio. It's regarded that on average, robo-advisors do cost less than financial advisors but they lack the ability to create comprehensive plans and the choice of specific assets to match those plans. As such it is a growing industry that disrupts Wall Street and it currently shows no signs of slowing.
To measure the success of Wealthfront there are multiple ways to evaluate the companies efficiency as an investment firm against traditional competitors and those in direct competition with robo-advisory firms offering similar services. These include:
- Return on Invested Capital
- Sales Growth Rate
- Earnings Per Share Growth Rate
- Equity Growth Rate
- Operating Cash Flow Growth Rate
Based on these metrics, we can determine that Wealthfront is a leading competitor in the industry as it is a member of a branch of financial advisory that has amassed 400 billion AUM and the industry as a whole has an average growth rate of 31%. Investors, according to Wealthfront's webpage have (using portfolios with the risk score of 9) seen there pre-tax investments grow by an average of 9.88% every year. However, Wealthfront Risk Parity Fund (WFRPX) is currently sitting at an -11.95% YTD Return on NASDAQ. This however is in contrast to it's best 1 year Return between 2018 and 2019. The downtrend may be an impact of the economic recession caused by material shortages, covid and inflation rather than a direct criticism of Wealthfront or robo-advisory as a whole. The robo-advisory technology industry is a rapidly growing, dynamic and competitive market.
SOURCE: finance.yahoo.com/quote/WFRPX/
While Wealthfront offers competitive and proven methods of portfolio management it is not the largest holder of AUM in comparison to the total assets in the sector. Managing just 24 out of 400 billion dollars in assets (6%). Similar to competitor Betterment and much higher than Personal Capital and other smaller fintech investment firms. It is however over-shadowed by SigFig who are managing 350b in assets as of 2017. They do however receive competitive funding compared to competitors and have amassed 204.5m total funding.
Wealthfront could increase investor interest by providing competitive return rates on the staking of applicable Cryptocurrencies as the digital assets market becomes more publicised and entrenched in the financial world. This would be entirely optional and would allow investors who already have a portfolio with Wealthfront to also consolidate any digital assets they hold onto the same platform, this would lead to increased customer satisfaction with there assets stored in the same domain and win over crypto holders who will be enticed by the return rates for staking. This could then open up there services to the international market of non-US Nationals who would benefit from there services. With a broad approach to investors of all speculative types, Wealthfront could amass global attention and increase there consumer base exponentially in a short frame of time.
The technology behind such an integration would be demanding and would almost certainly require the hiring of more experienced staff with coding, fintech and development background with experience which would be costly, however the partnership with a cryptocurrency exchange that offers staking already at a competitive rate such as Nexo or UniSwap could prove to be beneficial to both companies if they were willing to integrate the elements necessary to facilitate proof-of-stake functionality on a network or provide the server space and technical experience necessary to operate there own protocol through Ethereum or BNB. Thus extending the operation of the business to not just robo-advisory but a digital asset exchange aswell. These emerging technologies are suitable because cryptocurrencies and robo-advisory are both highly specialised, rapidly growing fields of financial industry that overlap by virtue of market disruption, asset management and both make up an investors portfolio. So it is logical to conclude that there union is inevitable.
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