Wealthfront is an innovative new financial advisory service that addresses the needs of a new generation of tech-savvy investors who seek an alternative, low-cost approach to managing their investments.
We recently sat down with Daniel Carroll, Wealthfront’s Co-Founder, to learn more about the Wealthfront service and approach.
Q: Tell us a little bit about Wealthfront
Daniel Carroll – Wealthfront is an SEC registered online investment advisor that manages your investments for you so you can live your life. We provide sophisticated investment advice at 75% lower fees than traditional financial advisors.
We are backed by well-known investors including Marc Andreessen, Jeff Jordan, DAG Ventures, and retired partners from Benchmark Capital and Kleiner, Perkins, Caufield & Byers.
Q: Why should people use it?
Daniel Carroll – Wealthfront offers clients an alternative to high cost traditional investment advisors. We provide a simple to use, transparent, low-cost platform that uses Modern Portfolio Theory to manage your investments. We allocate your investment into 6 asset classes based on a risk score that is determined by a brief investment questionnaire. We recommend a sound portfolio and rebalance it for you when necessary.
Q: How does Wealthfront differ from traditional investment advisors?
Daniel Carroll – There are two crucial differences. First is cost. Traditional financial advisors charge an average of over 1% while Wealthfront charges just 0.25%. We also don’t charge management fees on the first $25k invested. Being a completely automated platform and removing the middleman allows us to offer dramatically lower fees.
Second difference is service – Most customers of traditional financial advisors have quarterly meetings with their financial advisors and frequent calls to check up. Wealthfront automates the handholding experience through leveraged communication platforms such as email, webinars, tools, and conferences. We’ve found that most of our clients actually don’t want to talk to anyone on the phone and prefer to do everything electronically.
Q: Who are your target customers?
Daniel Carroll – Wealthfront targets 25 – 35 year olds who work in the tech community. Our product, voice and blog reinforce that focus. Many of our clients have been approached by traditional financial advisors and are turned off by the high fees and the biased products. They don’t trust these types of advisors they call “suits”. Wealthfront provides an alternative to the suits and fills that void.
Q: How does Wealthfront work?
Daniel Carroll – Here’s a great video that provides an overview of our approach.
Wealthfront- How It Works from Wealthfront on Vimeo.
Q: You mentioned Modern Portfolio Theory. What is that, and how can it help retail investors?
Daniel Carroll – Modern Portfolio Theory (MPT) attempts to maximize a portfolio’s expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various asset classes rather than selecting individual securities. Almost every academic and investment professional believes MPT is the best approach to manage an individual’s portfolio. Historically, rigorous MPT-based investment advice has only been available through high-end financial advisors who typically require minimum account sizes of at least $1 million and charge annual fees of at least 1% of assets under management annually. Wealthfront’s Online Financial Advisor service makes it possible for everyone to enjoy cost-effective access to the benefits of MPT.
Q: Tell us more about how Wealthfront manages rebalancing.
Daniel Carroll – The composition of your portfolio allocation will drift over time, as some of your holdings outperform others. Wealthfront continuously monitors your portfolio and periodically rebalances it back to your target allocation in an effort to manage your risk exposure and produce more stable returns for you. In deciding when and how to rebalance, we carefully consider commission costs and tax implications.
A study performed by David Swensen, Chief Investment Officer of Yale University, found that rebalanced portfolios earned an average of 0.4% more per year over 10 years than portfolios that were not rebalanced. [Source: David Swensen, Unconventional Success (2005) 195] You can find more information on rebalancing on our blog.
Q: Why did you choose Xignite as your market data provider?
Daniel Carroll – First, I want to compliment Xignite on being a great partner. Your service and support is of tremendous value to firms like ours who are looking to quickly integrate market data into a website without a great deal of overhead on the back end. Your flexible SOAP architecture is so easy to use and it was seamless to integrate into Wealthfront’s service. Choosing Xignite as our market data provider was a no-brainer.
Q: We hear that you are having a conference in April focused on IPOs. Tell us more.
Daniel Carroll – The focus will be on IPOs, their significance, and how to get there. The event will feature discussions from CEOs and venture capitalists including Bill Gurley from Benchmark Capital, Sameer Gandhi from Accel Partners, Doug Leone from Sequoia Capital, Frank Quattrone from Qatalyst Partners, and more. Obviously, Wealthfront benefits from IPOs, too! Many in the tech generation choose to invest their money with Wealthfront rather than with traditional financial advisors when their companies go public.
For a preview of the kinds of issues the conference will touch on, Wealthfront just released a video featuring several industry luminaries, including Eric Schmidt of Google, Bill Gurley of Benchmark Capital, Ben Horowitz of Andreessen Horowitz, and Frank Quattrone of Qatalyst Partners.