The Wealthfront Business Model – How Does Wealthfront Make Money?

Executive Summary:

Wealthfront is a financial services platform that provides investment, retirement, and cash management products to retail investors.

Wealthfront makes money via advisory fees, interest on issued loans, interchange fees, and interest earned on cash.

Founded in 2008 and headquartered in Palo Alto, California, Wealthfront has become one of America’s leading robo-advisors. The company has more than $20 billion in assets under management while having raised a total of $204.5 million.

What Is Wealthfront?

Wealthfront is a FinTech company that offers various fund management and investment products to retail investors.

Opening an account with Wealthfront allows consumers to high-interest checking account without the need for paying fees. Users can even benefit from a 0.35% APY while receiving a debit that can be used for purchases. The checking account is offered in cooperation with Green Dot Bank.

Second, Wealthfront users can opt in to have parts of their account balance invested every month. The company puts the majority of money into a globally diversified portfolio of low-cost index funds (mostly ETFs).

Users can also borrow money through Wealthfront’s Portfolio Line of Credit feature. Wealthfront then checks the user’s account balance and credit history. If everything checks out, then loans can be approved as quickly as 1 business day.   

The company furthermore offers a plethora of educational content on optimizing one’s savings, how to save for retirement, or general money management and investment advice. Wealthfront employs a team of Business and Economics PhD’s to provide academically sound tips to its user base.

Customers can access Wealthfront via its website as well as by download the company’s Android or iOS app, respectively.

A Short History Of Wealthfront

Wealthfront, headquartered in Palo Alto, California, was founded in 2008 by Andy Rachleff (CEO) and Dan Carroll.

Prior to launching Wealthfront, Rachleff was helping other businesses in the Valley to establish worldwide dominance. He founded Benchmark Capital in 1995, which quickly rose to become one of the most-renowned startup investors.

Under his watch, Benchmark invested into startups like eBay, OpenTable, AOL, or Friendster. He departed Benchmark in 2004 to focus on teaching Entrepreneurship at Stanford.

Luckily, Benchmark did just fine after he left. The company, under the helm of legendary venture capitalist Bill Gurley, led investments in startups like Dropbox, Discord, Uber, Snapchat, Zillow, Yelp, Instagram, and many more.  

Meanwhile, Rachleff moved on to apply what he taught at Stanford in the real world. In 2007, he launched a company named Fantasy Stock Exchange (or FSX) on Facebook’s app platform, which quickly pivoted into its own standalone platform.

Wayback Machine

It rebranded as kaChing and allowed private investors to compete with friends, family, and other users on the platform. The goal was to achieve the highest return on your investments, which would then be publicly shared on the platform and could be copied by others who didn’t have the time to do proper research.

The goal for kaChing was to bring more transparency to the mutual fund industry, which had traditionally been very secretive about the returns it achieved (they only disclosed the positions they held at the end of each financial quarter).

The best-performing investors were branded as Geniuses and their trading history was visible to all registered users. They would then need to deposit $3,000 into their accounts and kaChing would simply mimic the trades of a Genius – without any effort required from the user.

To get themselves a sweet head start, kaChing received a $3 million seed round from Andreessen Horowitz in December 2008. Exactly a year later, DAG Ventures poured another $7.5 million into the company.

In 2010, kaChing rebranded to Wealthfront to give itself a more adult image. At the time, distrust in the financial system was at an all-time high because of the effects of the Great Depression. The name kaChing sounded, as Rachleff stated, too much like “hot money”.

Given that the company was managing user’s savings, it thus needed a more adultery image to increase trust. By the time of the rebrand, Wealthfront had amassed more than $100 million in assets under management (AUM).

Part of the company’s early success was grounded in the fact that it was strict in vetting the fund managers (who became its Geniuses) that applied to its platform. Only 10 percent of all applications were accepted.

Second, Wealthfront early on established itself as the investment platform that Silicon Valley’s tech employees should trust. Many of them came to unexpected wealth when their employers, such as Facebook, Google, or Instagram, went public or were acquired for billions.

They immediately had scammy-looking wealth advisers knocking at their doors, asking them to invest money on their behalf. Wealthfront, which was conveniently based at the epicenter of the Valley, branded itself as a transparent and technology-first investment platform.

Its fee structure was always transparent to its users. The platform gave users full visibility of how their portfolio was perming at any time. Furthermore, no advisory fees were charged for customers that had less than $25,000 in their account (and only 0.25 percent for anything above).

Furthermore, its platform could be used without much time investment, thus allowing them to focus on their challenging jobs. After all, these were the same people that paid Postmates couriers $8 to have $5 coffees delivered to them.  

As a result, 50 to 60 percent of Wealthfront’s users were based in Silicon Valley. Additionally, more than 55 percent of its clients were younger than 35.

By 2014, on the strength of word-of-mouth and an ever-increasing range of products, Wealthfront hit the magical mark of $1 billion in AUM. A few months later, in early 2015, it hit the $2 billion mark.

Unfortunately, all that growth was enjoyed without the presence of Rachleff. He stepped down in early 2014 to again focus on investing into startups at Benchmark. Adam Nash, who joined the company in 2012 as COO and previously worked at LinkedIn, became the company’s new CEO.

Under Nash’s lead, Wealthfront grew to over $4 billion in AUM. Unfortunately, while Wealthfront was America’s leading robo-advisor for the majority of its lifetime, it eventually was outgrown by its main rival Betterment.

By 2015, Betterment had surpassed Wealthfront, amassing over $6 billion in AUM. As a result, Nash’s time as CEO came crashing down soon after. In October 2016, Rachleff became the company’s CEO again and remains so to this date.

Apart from being able to raise more money, Betterment’s main selling point was that it appealed to a much wider audience of consumers. While Wealthfront, to this date, does not work together with wealth advisors, Betterment’s investment advice is made in conjunction with experienced and company-vetted financial managers.

To combat some of these customer concerns, Wealthfront rebranded its website and app to appear more human-centered. It also created educational content from experienced finance professionals, such as its Financial Health or Home Buying Guide.

The company also faced a few instances of public backlash over the course of its lifetime. In 2018, the SEC fined Wealthfront $250,000 for making false claims to its investors about an automated financial product the company had launched before.

Over the past few years, both Betterment and Wealthfront have started to branch out into all different categories in the financial space, including borrowing, checking accounts, or debit cards.

This is a wider trend observed in the FinTech space. Neobanks, such as Chime or Revolut, are oftentimes cross-selling by implementing new products such as stock investments, automated savings, or allowing customers to book insurances through their platforms.

As for Wealthfront, it is now the second-largest robo-advisor in the United States – with Betterment continuing to lead the pack. Wealthfront now holds over $20 billion in AUM. The company now employs more than 300 people within its Palo Alto office.

How Does Wealthfront Make Money?

Wealthfront makes money by charging advisory fees for its investment product, from interest on loans, debit card fees, and compensations from its partner bank (Green Dot Bank).  

Let’s dive into each of these monetization methods in more detail below.

Advisory Fee

Wealthfront charges an advisory fee of 0.25 percent per month on the user’s account balance. If, for instance, the user holds $10,000 in their account, Wealthfront charges $2.08 every month.

The company claims that its advisory fee is less than a quarter of the industry average, which would come out at about 1 percent.

As previously stated, Wealthfront’s investment decisions are algorithmically driven and focus on low-cost and -risk index funds (ETFs).

Wealthfront’s algorithms allow it to conduct over 900 trades every year. That’s equal to a time investment of 150 hours as well as $6,321 in fee savings.

Additional features include tax-loss harvesting (i.e. finding opportunities to lower a user’s tax bill), risk parity for accounts over $100,000 (allowing users to invest in a more diversified portfolio), as well as smart beta.

Wealthfront also applies a low fund fee, which is between 0.06 to 0.13 percent, which is charged by the companies that run the index funds Wealthfront ultimately invests in.

Competing services charge a significantly higher amount. Vanguard, through its Personal Advisory service, comes in at 0.30 percent while fees for Personal Capital range between 0.49 percent to 0.89 percent.

529 College Savings Plan

A 529 plan is a tax-advantaged method to save and invest money to pay for your kid’s tuition. Investing in a 529 plan can have various benefits, mainly reducing the amount of tax paid for capital gains.

Wealthfront’s 529 college savings plan helps clients save in an automated way. The investment strategy is similar to its regular investment product by mainly focusing on low-risk funds.

Users pay the normal 0.25 percent advisory fee. On top of that, a program administration fee of 0.01 to 0.05 percent is applied. Lastly, ETF expenses (the money charged by the operator of the ETF) of 0.11 to 0.15 percent are charged.

Portfolio Line Of Credit

In April 2017, Wealthfront launched its Portfolio Line of Credit solution. It allows users to borrow money directly from Wealthfront.

Wealthfront uses the user’s account balance as collateral as well as to assess the risk of credit default. The higher a user’s account balance and credit score, the easier it is to receive a loan. Users with an account balance of $25,000 and more will automatically have a line of credit available to them.

Wealthfront earns money on the interest that it charges for the loan. Interest rates range from 2.40 to 3.65 percent, depending on the user’s account balance. Users can borrow up to 30 percent of their account balance.

Cash Accounts

Wealthfront offers three types of cash accounts, namely Individual, Joint, and Trust. The account allows users to pay their bills, deposit paychecks, earn interest on their account balance (currently 0.35 percent APY), and a Wealthfront-branded debit card to make payments.

The account itself is free of charge and can be opened with a minimum balance of $1. Wealthfront monetizes these cash accounts in two ways, namely by investing the user’s account balance as well as fees collected on debit card payments.

Wealthfront, just like any normal bank, uses the cash residing on user accounts to lend it out to other institutions, such as said banks.

They then collect interest from these institutions (also called Net Interest Margin). For 2019, according to Statista, net interest margin for all U.S. banks was equal to 3.35 percent.

Second, Wealthfront generates revenue from the fees it collects whenever a user pays with its debit card (called interchange fees). Merchants normally pay around 1 percent for these types of payments. The income, in all likeliness, is shared with VISA, which is the payment processor behind the debit card.

Wealthfront Funding, Valuation & Revenue

According to Crunchbase, Wealthfront has raised a total of $204.5 million across 6 rounds of venture capital funding. Notable investors into the company include Greylock, Index Ventures, Benchmark, Spark Capital, and many more.

Wealthfront is valued at around $500 million based on Pitchbook reports. This represents a sharp decrease (by more than 28 percent) from the $700 million valuation the company amassed in 2014.

Wealthfront’s revenue has not been increasing to a level that justifies such a high valuation. For 2019, the company reportedly only generated around $35 million in annual revenue.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.