Wealthfront offers retail investors a range of financial products, including investment, retirement, and cash management.
Wealthfront business model is based on charging its users advisory fees, lending money, charging interbank fees, and charging users interest on cash deposited by them.
Wealthfront was founded in 2008 and is headquartered in Palo Alto, California. Since then, it has grown to become one of the largest Robo-advisory firms in the United States. The company managed over $20 billion in assets and raised $204.5 million.
Table of Contents
- What is Wealthfront?
- How Does Wealthfront Work?
- Wealthfront Business Model
- How Does Wealthfront Make Money?
- What is the Funding & Valuation of Wealthfront?
- What is the Revenue of Wealthfront?
- Success Story of Wealthfront
- Key Takeaways from Wealthfront Business Model
What is Wealthfront?
Wealthfront is a Fintech platform that offers investing, retirement, and cash management solutions to retail customers.
Most of the company’s revenue comes from advisory fees, calculated at 0.25 percent of assets under management. Furthermore, the institution earns interest on cash balances and a line of credit.
How Does Wealthfront Work?
Wealthfront’s mission is to provide individual customers with a variety of fund management and investment options.
Wealthfront offers high-interest checking accounts without charging fees. Consumers can open an account for free.
Users can also earn 0.35 percent of the annual percentage yield when using a debit card for purchases. Green Dot Bank is offering a checking account in collaboration with Wealthfront.
Members of Wealthfront can also elect to have their account balance automatically invested from a portion of their account balance every month.
The majority of the firm’s assets are invested in low-cost, internationally diversified index funds (mostly exchange-traded funds).
The Portfolio Line of Credit service, offered by Wealthfront, allows users to borrow money as well.
Wealthfront then verifies the user’s account balance and credit history. Normally, loans can be approved within one business day if everything checks out.
The organization also provides a wealth of educational materials on preparing for retirement, improving one’s savings, and basic money management and investment guidance.
Wealthfront consults with business and economics PhDs to offer its users academically competent advice.
Customers can access Wealthfront via the company’s website or by downloading the company’s Android or iOS app.
Wealthfront Business Model
Wealthfront earns most of its revenue from an annual advisory fee of 0.25 percent on assets under management. An individual who manages $7000 would be paid $1.46 a month.
Wealthfront believes that its lower fee structure will increase investor balances even though it is a quarter of the industry average. The organization has no management fee on balances under $5000, so this is crucial to them.
The company also charges the user a 0.07-0.13 percent fund fee. The charge is levied by the firms that administer the index funds in which Wealthfront invests.
How Does Wealthfront Make Money?
Wealthfront generates revenue through consulting fees, interest on loans, debit card fees, and compensation from partners (Green Dot Bank).
Here’s a closer look at each of the monetization strategies of Wealthfront.
Wealthfront charges its customers a monthly advising fee of 0.25 percent. Wealthfront charges $2.08 a month, for example, for an account with $10,000.
The company’s advice charge is less than one-quarter of the industry average, or about 1%.
Investments at Wealthfront are based on algorithmic processes and prioritize low-cost, low-risk index funds (ETFs).
Wealthfront’s algorithms enable the company to execute over 900 trades every year. This equates to a time investment of 150 hours and a fee savings of $6,321.
The platform offers tax-loss harvesting (detection of ways to lower a user’s tax liability), risk parity for accounts over $100,000 (enabling users to invest in a diversified portfolio), and smart beta.
Wealthfront charges a minimal fund fee paid to the companies that manage the index funds it invests in.
The charges of competitive services are significantly higher. The Vanguard Personal Advisory service charges 0.30 percent; Personal Capital charges 0.49 to 0.89 percent.
Loans Against a Portfolio
Wealthfront debuted its Portfolio Line of Credit service in April 2017. It enables users to borrow money from Wealthfront immediately.
Wealthfront uses the balance of the user’s account as collateral and calculates the risk of credit default.
The more money in a user’s account and the better their credit score, the easier it is to obtain a loan. A line of credit will automatically be available to users with a balance of at least $25,000.
Wealthfront makes money by charging interest on loans. The user’s account balance determines the interest rate, which ranges between 2.40 percent and 3.65 percent. The maximum amount that users are permitted to borrow from their account is 30%.
529 College Savings Plan
Your child may benefit from a 529 plan by saving for college and investing for it tax-advantaged. Investment in 529 plans has numerous advantages, the primary one being that capital gains taxes can be reduced.
The College Savings 529 plan from Wealthfront simplifies the process of saving for college. The investment approach is similar to that of the company’s standard investment product, with a primary focus on low-risk funds.
The standard advising charge is 0.25 percent. A program administration fee of 0.01 to 0.05 percent is also imposed. ETF expenses (the money charged by the ETF’s operator) range from 0.11 percent to 0.15 percent.
With Wealthfront, you can open a cash account for yourself, a joint account, or a trust account.
A Wealthfront account allows users to pay bills, deposit paychecks, earn interest on their account balance (currently 0.35 percent annual percentage yield), and make payments using a Wealthfront debit card.
You can create the account for free, as long as you have at least $1 in your account. Wealthfront generates revenue from these cash accounts in two ways: through investments and by collecting fees from debit card payments.
Wealthfront, like other banks, lends the funds in customer accounts to other entities, including other banks.
These institutions pay interest to these investors (also called net interest margin). Statista reports that the net interest margin for all US banks in 2019 was 3.35 percent.
Secondly, Wealthfront makes money when someone uses their debit card to complete a transaction (called interchange fees). Merchants typically pay around 1% for these types of payments.
There is a strong likelihood that the revenue is distributed between VISA, the processor of debit cards.
What is the Funding & Valuation of Wealthfront?
Crunchbase reports that Wealthfront has raised $204.5 million in venture capital funding over six rounds. Investors such as Greylock Ventures, Index Ventures, Benchmark, and Spark Capital have made significant investments in the company.
Pitchbook reports Wealthfront’s valuation at about $500 million. This results in a significant decrease (more than 28 percent) from the 2014 value of $700 million.
Wealthfront’s revenue has not grown at a rate consistent with such a high valuation.
What is the Revenue of Wealthfront?
According to reports, Wealthfront made $35 million in revenue this past year.
Success Story of Wealthfront
Andy Rachleff (CEO) and Dan Carroll founded Wealthfront in Palo Alto, California, in 2008.
The founder of Wealthfront assisted other Silicon Valley companies in establishing global dominance before founding the company. His company Benchmark Capital fast became one of the most well-known startup investors globally after its launch in 1995.
The company benchmark-funded startups such as eBay, OpenTable, AOL, and Friendster during its tenure. He left Benchmark in 2004 to teach Entrepreneurship at Stanford.
He left Benchmark functioning normally, fortunately. Many of its investments were led by renowned VC Bill Gurley, including Dropbox, Discord, Uber, Snapchat, Zillow, Yelp, and Instagram.
Rachleff continued to apply the information he learned at Stanford to reality. He founded Fantasy Stock Exchange (or FSX) using Facebook’s app platform in 2007, which swiftly grew into its standalone site.
It relaunched as kaChing and included a feature that lets private investors compete against friends and family.
The goal was to maximize your return on investment, which would then be disclosed publicly on the platform and replicated by others lacking time to do their research.
Kasching’s mission was to increase transparency in mutual funds, which for years had been exceptionally secretive about their returns (they only disclosed the positions they held at the end of each quarter).
The most successful investors were called Geniuses, and their trading histories were made public.
kaChing then automatically replicates the trades of a genius – without the user having to do anything.
KaChing raised $3 million in December 2008 from Andreessen Horowitz to kick-start the company. A year after the first investment, DAG Ventures made another investment of $7.55 million.
There was a lot of mistrust in the financial system during the Great Depression due to the impact of the Great Depression.
KaChing changed its name to Wealthfront in 2010 to project a more mature image. Rachleff noted that the name kaChing sounded suspicious, like “hot money.”
The organization inextricably linked to its users’ savings, requiring a more adulterous image to foster trust. Wealthfront has gathered more than $100 million in assets under management at the relaunch time (AUM).
The company’s early success was largely due to its stringent screening of fund managers (who became its geniuses) who applied to join its platform. The number of accepted applications was only 10%.
Secondly, Wealthfront quickly became the company of choice for technology employees in Silicon Valley.
Many of them became wealthy unexpectedly after their firms, such as Facebook, Google, or Instagram, went public or were acquired for billions of dollars.
They were quickly approached by shady-looking financial advisers offering to invest their money on their behalf.
Wealthfront, conveniently located at the Valley’s hub, positioned itself as a transparent, technology-driven investment platform.
Its cost structure was always completely transparent to users. The software provided customers with complete visibility into the performance of their portfolios at any point in time.
Additionally, consumers with less than $25,000 in their account were not charged advising costs (and only 0.25 percent for anything above).
Additionally, its platform is simple to use, allowing them to focus on their difficult responsibilities. After all, these were the same individuals who paid $8 to Postmates couriers to deliver $5 coffees to them.
As a result, Silicon Valley accounted for between 50% and 60% of Wealthfront’s users. Additionally, almost 55% of its clients were under the age of 35.
By 2014, Wealthfront has surpassed the magical $1 billion thresholds in AUM, owing to word-of-mouth and an ever-expanding product offering. It surpassed the $2 billion milestones a few months later, in early 2015.
Regrettably, none of this growth occurred in the absence of Rachleff. He stepped down in early 2014 to refocus his efforts at Benchmark on investing in startups.
Adam Nash, who joined the company in 2012 as a chief operating officer and previously worked at LinkedIn, was named CEO.
Wealthfront grew to over $4 billion in AUM under Nash’s leadership. Unfortunately, while Wealthfront was America’s premier Robo-advisor for the bulk of its existence, it was finally eclipsed by Betterment.
Betterment surpassed Wealthfront in terms of AUM in 2015, amassing over $6 billion.
Nash’s tenure as CEO ended abruptly as a result. He was reinstated as CEO of the company in October 2016 and continues to be so to this day.
The primary selling point of Betterment was its ability to raise money and appeal to a broader consumer base.
Wealthfront has not collaborated with wealth advisers yet, but Betterment offers investments advice that is vetted by professional financial experts.
Wealthfront revamped its website and mobile application to make them appear more human to address these client issues.
The company has also created educational content with the assistance of seasoned financial experts, such as its Financial Health Guide or Home Buying Guide.
The company’s existence was also marked by some public outrage incidents. A financial product that Wealthfront had previously released was fined $250,000 by the SEC for making false representations to investors.
Wealthfront and Betterment have diversified their product offerings in recent years and now offer checking accounts, debit cards, and loans.
The FinTech field is experiencing a similar trend. Neobanks, such as Chime and Revolut, often engage in cross-selling by adding new products, such as stock investments, automatic savings, or the ability to book insurance directly through their platforms.
The Wealthfront Robo-advisor is currently the second most popular in America, following only Betterment. Wealthfront has an AUM of more than $20 billion today. The company presently employs over 300 workers in its Palo Alto headquarters.
Key Takeaways from Wealthfront Business Model
Wealthfront is a financial services platform geared towards Millennials looking for a low-cost online investment and banking platform.
Wealthfront generates the majority of its revenue through low-cost management fees. This platform earns less in management fees than other platforms but aims to expand portfolios in the growing retail sector.
Wealthfront also earns money by offering qualified consumers a direct line of credit and charging interest on the amount borrowed. The organization also allows young parents to invest in their children’s college tuition, thereby minimizing capital gains tax.