Why big RIAs are taking a risk on Wealthfront

KaChing changes its name, gains 10-fold jump in assets and intrigues the industry with its strategy to reach mass affluent

Tuesday 10.19.10 by Elizabeth MacBride
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The reaction of independent advisors to the upstart Facebook app-turned-technology-and-distribution platform that today renamed itself Wealthfront could be summed up in two words: intrigued and bemused.

Formerly known as Kaching, Wealthfront today announced its new name, the elimination of all amateur investors from its platform, the hiring of former Fidelity vice president to lead its sales effort, and a small milestone: it now has $100 million in AUM.

Wealthfront, which is backed by big venture capitalists and executives from the technology sectors, has been rapidly evolving its strategy over the past year. It appears to be betting that the consumer behavior that is helping companies including Netflix and OpenTable revolutionize their markets will hold true in financial services. If you give consumers information, an easy-to-use website and some assurance of quality, they will flock there for professional financial advice.

If it succeeds, the idea could upend the market of advice for the mass affluent. Currently, most people with $100,000 to $500,000 to invest receive financial advice through expensive independent broker-dealers, through discount brokerages or through fairly unsophisticated insurance agents and brokers, said Bing Waldert, an analyst for Boston-based Cerulli Associates.

But building that market for the mass affluent depends on attracting high-quality money managers to the platform. So far, about 30, including RIAs and a few hedge funds, are on the platform. They’ve met Wealthfront’s standards for managing money, which are based on weighted risk adjusted returns and their ability to generate outstanding returns consistent with a stated investment strategy. The platform seems to make the most sense for advisors who are large enough and have been successful enough as money managers to look for new distribution channels, said Waldert.

“It’s kind of an experimental piece at this point,” said Blaine Docker, COO of Main Management, a San Francisco based RIA with $450 million AUM. Main Management will seed its account on Wealthfront’s platform with money from the firm’s principals. “We’re seeing if this is a viable way to bring our (investment) strategy to smaller investors.”

Big names

Typically, Main’s minimum is $2 million.

Wealthfront, which had only about $8 million in AUM last April, is making it easy for money managers to jump on the platform. Wealthfront is an RIA itself, so it handles the customer relationship part of the work, as well as compliance. Currently, it custodies and provides brokerage services through Interactive Brokers. Co-founder Dan Carroll says he believes the company will have $1 billion of assets within a year.

Along with the target market, the other intriguing element about Wealthfront is the people involved in it. The company, which began life as a Facebook application that allowed amateur investors to pit their skill against each other, has had $10.5 million of investment from Silicon Valley luminaries including Marc Andreessen and Ben Horowitz of Andreessen Horowitz, Kevin Compton and Doug Mackenzie, Dave Beirne and Bruce Dunlevie, Jeff Jordan of OpenTable; and Mike Volpi of Index Ventures.

The idea behind Wealthfront is that individual investors who wouldn’t be able to afford the services of these successful RIAs (those on the platform have an average AUM of $600 million though most have only a tiny percentage of their total AUM on Wealthfront’s platform) will be able to pick money managers, allocating and re-allocating investments between them as they study many pages of underlying data on each money manager’s investments and track records. Investors will also receive recommendations from Wealthfront.

Money managers are charging a 1% fee on the platform; Wealthfront keeps a quarter of that. The fees are lower than a mass affluent client would pay for similar advice, but whether many people will be comfortable enough with Wealthfront’s model to invest their money remains to be seen.
“If you make a bad choice on Netflix, it’s over in two hours,” Waldert said.

New hire for a sales strategy

The company, which has 25 employees, is first focusing on building its assets, and options for consumers, by recruiting money managers to the platform. It is also hoping that wealth managers will allocate some of their assets on the platform. It has hired Kris McCabe as senior vice president, sales. He has been a Fidelity Investments vice president within the Institutional Services Division, assisting Registered Investment Advisors in streamlining and expanding their practices.

Carroll said that initially, he believes most of the growth in AUM would come from RIAs joining and shifting some assets to the platform. Eventually, he said, Wealthfront could be a significant referral source for managers on the platform.

For now, the money managers on the platform say that because it’s easy to use, there’s little risk, and potentially great reward, in being on it.
“It seems to make a lot of sense in a lot of different ways,” said Docker, who said Main will establish a portfolio that uses a sector rotation strategy on the Wealthfront platform.

Spencer Rhodes, chief operating officer of Sausalito-based Tradewinds Investment Management, said his firm’s primary interest is not in distribution, but in the intellectual property of the portfolios its team manages. They focus on emerging markets.

Tradewinds is putting a portfolio of American Depository Receipts on the platform. Normally, he said, only people with a net worth of $1.5 million can invest in hedge funds, so this is a way of broadening the fund’s distribution without investing anything but time.

He said the caliber of people behind Wealthfront helped sell Tradewinds on joining the platform.

“The people involved eased [the difficulty in telling] the story,” he said.

Dan Carroll

KaChing | Tradewinds | Wealthfront | Main Management