{"id":2555,"date":"2015-11-22T17:29:43","date_gmt":"2015-11-22T22:29:43","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/wealthfront-and-the-future-of-robo-advisors\/"},"modified":"2015-11-22T17:29:43","modified_gmt":"2015-11-22T22:29:43","slug":"wealthfront-and-the-future-of-robo-advisors","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/wealthfront-and-the-future-of-robo-advisors\/","title":{"rendered":"Wealthfront and the Future of Robo Advisors"},"content":{"rendered":"<p>Over the past few years, a new set of companies has begun\u00a0applying data analytics to disrupt the multi-trillion dollar\u00a0investment services industry by automating investment decisions. Wealthfront, one of the fastest growing of such &#8220;robo advisors&#8221;, has raised $129.5M in venture capital financing and holds over $2B in assets under management.<\/p>\n<p><strong>Value Creation<\/strong><\/p>\n<p>Wealthfront was built on the idea that technology can be used to automate many of the services performed by traditional investment advisors (e.g., Charles Schwab, Fidelity), such as constructing a portfolio, rebalancing assets, trading ETFs, reinvesting dividends, and performing tax-loss harvesting. Without the overhead of traditional advisors, Wealthfront can perform these functions at a fraction of the cost and is targeted a tech-savvy millennials who are comfortable using technology\u00a0and may even distrust financial institutions blamed for the 2008 financial crisis.<\/p>\n<p>Wealthfront&#8217;s automated investment methodology underpins their ability to create value for customers. According to Wealthfront,<\/p>\n<p>&#8220;Our investment methodology employs five steps:<\/p>\n<ul>\n<li>Identify an ideal set of asset classes for the current investment environment<\/li>\n<li>Select low cost ETFs to represent each asset class<\/li>\n<li>Determine your risk tolerance to create the appropriate portfolio for you<\/li>\n<li>Apply Modern Portfolio Theory to allocate among the chosen asset classes for your risk tolerance<\/li>\n<li>Monitor and periodically rebalance your portfolio&#8221;<\/li>\n<\/ul>\n<p>(Read about Wealthfront&#8217;s detailed methodology <a href=\"https:\/\/research.wealthfront.com\/whitepapers\/investment-methodology\/\">here<\/a>)<\/p>\n<p>In addition to automating investment decisions, Wealthfront also uses its algorithms to\u00a0customize\u00a0a user&#8217;s\u00a0portfolio based on individual risk tolerance, assessed through a series of questions on the user&#8217;s &#8220;objective <i>capacity<\/i> to take risk and subjective <i>willingness<\/i> to take risk. Our view is that sophisticated algorithms can do a better job of evaluating risk than the <i>average<\/i> traditional advisor.&#8221; (Wealthfront link\u00a0<a href=\"https:\/\/research.wealthfront.com\/whitepapers\/investment-methodology\/\">here<\/a>)<\/p>\n<p>The result\u00a0of Wealthfront&#8217;s data-based methodology is that it can manage customers&#8217; portfolios simply, conveniently and automatically, with lower fees than traditional human advisors.<\/p>\n<p><strong>Value Capture<\/strong><\/p>\n<p><a href=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Wealthfront-our-low-fees1.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-2529\" src=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Wealthfront-our-low-fees1.png\" alt=\"Wealthfront our-low-fees\" width=\"1076\" height=\"370\" srcset=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Wealthfront-our-low-fees1.png 1076w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Wealthfront-our-low-fees1-300x103.png 300w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Wealthfront-our-low-fees1-1024x352.png 1024w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Wealthfront-our-low-fees1-600x206.png 600w\" sizes=\"auto, (max-width: 1076px) 100vw, 1076px\" \/><\/a><\/p>\n<p>Wealthfront charges an annual fee of 0.25% of assets under management (AUM), with no fee on the first $10,000. Even with $2B AUM, Wealthfront could generate a maximum of $5M in revenue.\u00a0Traditional advisors, on the other hand, earn\u00a0up to 3% of from transaction fees, asset management fees, and other hidden fees, according to Wealthfront (see chart above). While this is an attractive value proposition for customers, low fees mean Wealthfront will need to reach greater scale in order to recoup its heavy upfront investments in building its technology and acquiring customers. Wealthfront&#8217;s fundraising history\u00a0and recent aggressive\u00a0marketing campaign imply it is burning cash quickly, and may have a ways to go before\u00a0becoming cash-flow positive.<\/p>\n<p><strong>Competition and The Future for Pure Robo Advisors<\/strong><\/p>\n<p>The robo-advisor space has become highly competitive, putting pressure on fees and business models. Wealthfront&#8217;s competitors include Betterment, WiseBanyan, and FutureAdvisor, among others. In a bid to attract smaller investors, Wealthfront recently dropped its minimum account value from $5,000 to $500,\u00a0critiquing Betterment&#8217;s business model which does not\u00a0have any account minimums but charges\u00a0$3 per month for accounts that deposit less than $100 per month.<\/p>\n<p>Moreover,\u00a0traditional players are entering\u00a0the space. Charles Schwab and Vanguard have each launched their own automatic investing platforms with similar fees. \u00a0Meanwhile,\u00a0Blackrock &#8211; the world&#8217;s largest asset management firm &#8211; acquired FutureAdvisor in August 2015. Services that <a href=\"http:\/\/www.forbes.com\/sites\/chancebarnett\/2015\/09\/01\/fintech-trends-wealth-management-and-the-rise-of-robo-advisors\/3\/\">combine human and automated advice<\/a>, with competitive fees, will present a challenge that pure robo advisors may not be able to meet. Although\u00a0traditional advisors may offer exit opportunities for companies such as Wealthfront, the traditional players may also decide it is easier or less expensive to develop their own solutions.<\/p>\n<p>Wealthfront and its peers\u00a0have\u00a0demonstrated there is massive value in automating investment decisions; however, in so doing they have provoked a daunting field of competition.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Wealthfront has disrupted the financial advisory industry by using analytics and algorithms to automate investment decisions. Will it be able to sustain its success?<\/p>\n","protected":false},"author":163,"featured_media":2556,"comment_status":"open","ping_status":"closed","template":"","categories":[655,776,650,146],"class_list":["post-2555","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-data","category-data-analytics","category-finance","category-fintech"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/data-driven-value-creation-value-capture-and-operating-models\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Wealthfront and the Future of Robo Advisors - Digital Innovation and Transformation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-digit\/submission\/wealthfront-and-the-future-of-robo-advisors\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Wealthfront and the Future of Robo Advisors - Digital Innovation and Transformation\" \/>\n<meta property=\"og:description\" content=\"Wealthfront has disrupted the financial advisory industry by using analytics and algorithms to automate investment decisions. 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