Charles Schwab 2.0: Millennial favorite Wealthfront crosses $1 billion in assets under management
It’s easy, in the era of Apple’s Jesus stock, Facebook’s IPO, WhatsApp-level acquisitions, and Uber's helium-filled valuation to become desensitized to the word “billion.” But it wasn’t that long ago when Justin Timberlake’s Sean Parker said, “A million dollars isn't cool, you know what's cool? A billion dollars.”
Today Wealthfront, an automated investment service, announced a milestone that demands to be celebrated. After just two-and-a-half years in business, the company has grown to $1 billion in assets under management (AUM), a figure that puts it among the 99th percentile of asset management firms. It’s also more than double the size of its nearest startup competitor, Betterment, which last reported managing just $500 million in assets.
More impressive, Wealthfront’s average account is just $93,000, a figure that has grown from $60,000 in 2012, but still remains modest relative to its traditional financial services peers. This means that a lot of people have chosen Wealthfront to manage their money -- not to mention that giving its service away for free to accounts under $10,000 hasn’t hurt its growth, either.
Reaching the $1 billion milestone is a reflection of the quality and appeal of Wealthfront’s service. But at the same time, it’s the result of launching its automated investment service at a time when Generation Y is beginning to build and manage wealth for the first time. It’s a phenomenon we’ve seen before, with Charles Schwab, which launched in 1975, offering a revolutionary low cost service to the then young adult baby boomers. The storied firm’s average client age was 25 throughout its first decade, and is now over 50. Charles Schwab now manages $2.3 trillion in client assets. Wealthfront CEO Adam Nash is hoping to similarly grow up with this generation.
“Its the first time since the baby boomers that you’ve had a generation large enough – 90 million people – to justify creating entirely new services targeted explicitly at them,” he says. “And this is the first generation that grew up with computers and software. They’re comfortable with technology and distrustful of traditional big business.”
Wealthfront has catered to this technology-first mindset by offering investment automation. Its clients aren’t day traders or even those who want to call their broker and talk strategy. Rather, Wealthfront attracts individuals who don’t want to think about their investments, and who prefer simplicity and predictability over risk and excitement. Apparently there are a lot of these people out there.
“Many people forget, but Wealthfront is fundamentally a pivot,” Nash says. “One of the reasons we’re so focused on these principles now is because of the lessons we learned at KaChing. Investors were telling us that they were looking for trust and credibility, and wanted to delegate investment management but were overwhelmed with making that choice. Wealthfront was born to answer the question of, what’s the simplest, most transparent solution we can deliver to this market?”
Wealthfront grew AUM by 450 percent in 2013 and is continuing a similar trajectory into 2014, according to Nash. Much of this growth has been viral, with current customers referring family, friends, and colleagues to the service.
“We’ve actually crowdsourced from our customers, who else should be our customers,” Nash says. “That’s how we know that the business resonates with millennials – we’re able to see who’s referred and who converts. It turns out, millennials don’t just like it, they love it.”
The other thing that Wealthfront has learned from its customers that millennials really, really hate traditional businesses, like mobile carriers, airlines, and banks – shocker. Nash boils it down to a feeling that these large corporations fill their offering with “gotchas,” not to mention dated and unpleasant technology user experiences. Wealthfront has built its business to be the antithesis of these legacy businesses.
Nash writes in a blog post this morning:
Millennials grew up with software and expect services to be delivered online. They don’t have the patience to have to talk to someone to complete their transactions. They lived through two market crashes and are highly cynical about the claim that you (or anyone) can outperform the market. They have been nickel-and-dimed through a wide variety of services, and they value simple, transparent, low cost services.
Most importantly, Millennials want to pursue their passions. Whether that be their careers, hobbies, families or otherwise, most do not believe that their path to success lies with actively managing their investments. Overwhelmingly, they seek an investment solution that is automated, index-based and low-cost. This couldn’t be more different from what the baby boomers, the last great generation (in terms of population) want from their investment service. Hence, this is an opportunity that has never existed before.
Of course, for all its growth, Wealthfront remains a $1 billion business in an industry that is measured in the trillions of dollars. For the optimist, that fact suggests that the company has plenty of growth ahead of it. For the cynic, among the top 1 percent of asset managers, it remains a very small fish.
The truth is a mix of both. Wealthfront has plenty of room to grow, but it’s already reached a scale that is unprecedented among its startup peers. The firm reached the $1 billion milestone twice as fast as Charles Schwab and will continue to have the growth advantages afforded by the internet going forward.
Wealthfront faces competition from Betterment, Motif, Personal Capital, and other technology-first financial services companies. And while large Wall Street banks many not offer a compelling automated investment service today, it’s a good bet that they will at some point in the future. The market is simply moving in that direction and there are too many dollars at stake not to respond.
“We expect competition, but we like our position,” Nash says. “As a category leader, we have a huge head start and the opportunity going forward to learn the most by listening to and focusing on our customers.”
For many clients, Wealthfront is the first investment services they’ve ever used. In fact, the company recently signed up its first 18-year-old client, at which point Nash recalls telling his team, “This may be our first customer that’s with us for 100 years.”
There’s more growth ahead for Wealthfront, not just in its assets under management, but in the products and services it offers customers. The company is already taking the unique approach of delivering career-focused content, catering to the priorities of its customers with information like startup equity calculator and 2013 Silicon Valley Career Guide e-book.
“We’re focused on delivering data-driven and actionable insights,” Nash says, adding that clients often tell the company that the sign up not just for what Wealthfront offers today, but for what they imagine it will offer in the future.
It’s been a frenzied sprint to this point, but Nash and co. will find themselves running a marathon to the finish. But you couldn’t ask for a better confluence of events to create an opportunity of this magnitude.
“We often forget as an industry that startups require a bit of magic to occur – we forget because we keep doing it,” Nash says. “But it requires new technologies to come together to make things possible that weren’t before. It also requires a big market opportunity and a reason why existing players can’t or won’t move quickly. This generational shift is a really big deal not just in the short term, but for the next decade or two.”