Rethinking Wealth Management in Internet Style

As we progress as a society, we have to allow our understanding of finances to also progress. This article by Mike Volpi really examines one way in which we can shape our thought process as far as wealth management goes.

When our good friend, Andy Rachleff, started Wealthfront with Dan Carroll a few years back, they held a revolutionary belief about how money should be managed. Having been a trustee of several university endowments, Andy had seen how larger and more sophisticated investors managed their funds. Efficient frontiers, rebalancing, tax efficiencies, custom portfolios…. All these were tools to better returns for these endowments. But, these tools were only available to investors who could afford the knowledgeable (and expensive) advice of asset managers.

The asset management business is a massive global business. In the US alone, $13 Trillion (yes, T, not B) of assets are managed by professionals or “do-it-yourselfers”. Yet, much of the technology and modern methodologies to manage those funds have not been available to the average person. Even in today’s Internet-enabled world, the financial services sector still remains a territory largely unchanged from its existence of decades past.

There are several factors that contributed to that reality. First, the expertise is locked in the hands of the high-end asset managers who cater to the multi-millionaire clientele. This is true whether the asset managers live in large banking firms like Goldman Sachs and UBS – or, smaller asset management specialists who work exclusively for the wealthy. Second, plugging a new service into the byzantine and complex ecosystem of finance is challenging to say the least. There are regulatory requirements, intricate connectivity to existing financial institutions, undocumented and private APIs – the list goes on. The incumbents in the business realize that this is a competitive barrier that favors them, and are in no hurry to let the disruptors cross the moat. Third, there is a huge lack of transparency in the financial services business. There are hidden fees, complex formulas, incomprehensible terminology, and so forth. Figuring out what value you are really getting is awfully challenging even for the astute. Finally, trust is a hugely important component of asset management. While we are quick to give away our email address, consumers think really hard about giving someone – especially a newcomer – their hard-earned savings to manage.

Even with all those roadblocks in the way, Andy and the team at Wealthfront believe asset management was ripe for disruption if they could apply software and technology in the right way. Wealthfront fundamentally believed that there was an opportunity to democratize sophisticated asset management techniques. They believed that middle-class people – with tens of thousands of savings – should have access to the same advice that millionaires have. It was not going to be a quick or easy journey, but the reward for it would be significant.

The key was to let software and the distribution of the Internet do the work that expensive asset managers had been doing for 10s of years. Wealthfront hired software developers (without the suits or briefcases….) who could architect and build software to emulate the complex models locked in the financial tools of asset managers. They demystified fees and how returns were created. They complemented that technological knowledge with the expert advice of legendary investors like Burt Malkiel (now Wealthfront’s Chief Investment Officer). The result is access to modern portfolio theory to every person with a savings account.

The journey wasn’t easy. It took 4 years to get all the pieces in place and to begin to earn the trust of clients. Now, Andy is no novice to the venture business. He’s a founder of Benchmark Capital and backed some household names like Equinix, Juniper Networks, and Opsware. It’s testament to his vision and tenacity that Wealthfront finds itself poised as the disruptor in this business. Most would have given up, but Andy and his team persistence has brought them into a truly unique spot.

A couple months ago, when he was giving me his usual humble update on the progress at Wealthfront, I quickly leaned forward in my chair. Month-on-month growth rate in assets under management at 30%; social spreading of the services; significant incremental infusions of assets by the same clients…. the signs were clear. They had turned the corner.

Today, we’re excited to announce that Index has led this financing round in Wealthfront. Given Index’s Swiss heritage, the business of investment management is one that is near and dear to our hearts, and, we think it’s never going to be the same. We couldn’t be happier to support Andy, Dan, Adam Nash and their team in this journey.

Mike & the Index Team

Source: LinkedIn


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