Ep. 128: February WealthTech News

Come on in, sit back, relax and enjoy episode 128 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, the founder and CEO of Ezra Group Consulting. Over the past 17 years, we’ve worked with hundreds of FinTech vendors and enterprise wealth management firms to guide them towards making better business and technology decisions.

The WealthTech Today podcast features interviews news and analysis on the trends and best practices in technology for wealth management, asset management, and other areas of financial services. We are coordinating with our partners at Kitces.com, so please check out The Latest In Financial #AdvisorTech (February 2022) and their Advisor Tech Map, which we work with Michael Kitces to produce.

This is our February News Roundup, where we cover a curated selection of the most interesting news stories in WealthTech. But this month, there’s one story that is so huge that I just don’t have time to talk about anything else, and that story Swiss Bank UBS Buying Pioneering Robo Advisor Wealthfront for $1.4 Billion. I’m going to dive deep on this one, from reviewing Wealthfront’s history and how we got here, providing details about the price and valuation, as well as my opinion on whether this is a match made in heaven or possibly someplace further south.

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Complete Episode Transcript:

Craig: UBS buys Wealthfront at a $1.4 billion deal. Of course, this story was in every media outlet that covers financial news, including the Wall Street Journal, Barons and all of the industry trade mags, InvestmentNews, WealthManagement.com, ThinkAdvisor, FinancialPlanning.com, and so on. One of the most informative pieces with the reporting came from RIAbiz written by Lisa Shindler.

Craig: So what’s been of the history of Wealthfront, how did we get here? Wealthfront was founded back in 2008 by Andy Rachleff, who also co-founded Benchmark Capital, one of the most successful venture capital firms, and they have been so successful they’ve invested in companies like eBay, OpenTable, Snapchat, Twitter, and Uber. So Andy’s a bit of a legend and he actually started out this firm called Kaching wasn’t called Wealthfront, and it was a crowdsourced investing platform that was gonna shake up the mutual fund industry where users could post their portfolios and others could invest in them, an idea which didn’t last very long once they tried to monetize it.

Craig: In 2010, the company made one of the many pivots and they abandoned the crowdsourced idea and launched an online investment service. That’s when the firm changed to Wealthfront. But it wasn’t a roboadvisor yet, they actually relied on a group of 44 RIAs and asset managers to run their client portfolios. It wasn’t until about the end of 2012, but they brought the portfolio management in house and began levying their 25 basis points asset management fee. And the Wealthfront we know now was born. Rachleff was the original CEO until their COO Adam Nash succeeded him in 2014. And Nash had was an alumni, both LinkedIn and eBay before joining the Kaching/Wealthfront.

Craig: Under Nash’s leadership, they had done something interesting, they started making bids to managed investments for the staff at all the tech corporations in Silicon Valley. Think companies like Facebook, Google, LinkedIn, Microsoft, Twitter and it became a factor in their early success since they brought in a lot of assets from a relatively small number of clients, and also gave them some cache to say, Hey, we’ve got all the Facebook money, we’ve got Google money. And also these are folks who had stock options that turned them into multi-millionaires overnight.

Craig: Wealthfront also rolled out a high net worth investment management service, tax loss harvesting, direct indexing, and was one of the earliest providers to provide that and their company motto was “we democratize access to sophisticated financial advice”. And they were off and running. Rachleff returned the CEO role in 2016. I was reading some articles around that time when Nash stepped down and Rachleff took over, and Darrin Courtney, who at the time was a principal executive at CEB said and this is I think prophetic, “where robo advisors tend to fall short is where your true advice needs to go beyond simple allocation”. And that’s really true. I think the robo advisors had to keep adding and keep expanding once they realized that the simple allocation of an ETF basket just wasn’t enough to keep clients, they needed more. And as their clients started to get older, these young tech people who were their core of their, their client base started to get older, have families and have more complex needs, they outgrew the simple roboadvising.

Craig: So I’ve written about Wealthfront many times on my blog and quoted the press many times, often I have to admit in a negative light. For example, I wrote one rather harsh article, which I entitled “Dead Robo Walking, Why Wealthfront is Doomed” back in 2016. Now their AUM back then was about $2.8 billion in in AUM. Now they’ve 10X it since then, so clearly they weren’t doomed, but what we were trying to say was they were never going to disrupt human advisors as they said they would, and as Rachleff was constantly tell about how human advisors of the past and that robo advisors of the future. In fact, Wealthfront never even came close to becoming the leader in robo advice, digital advice or online advice. Vanguard and Schwab hoovered up 80% of the assets that were in that space and Wealthfront and Betterment and all the rest were always always chasing them.

Craig: I also wrote an article called “Why Acorns is the Only Robo Advisor That Could Be Worth a Billion Dollars”, that was also 2016. So inflation has risen a bit since then, but everyone really wants that billion dollar valuation. It’s so common that everyone just wants to be able to say that, hey we got a billion and that is sort of a badge of honor, Hey, we’re successfulwe made a billion dollar valued company and of course, a billion isn’t what it used to be with inflation, but there’s still firms looking to get a billion.

Craig: Now Wealthfront’s been on the market since at least November of last year when we saw some articles about them putting themselves on the block and trying to find some buyers, but really couldn’t find anybody. There were rumors that they were shopping out to other wirehouses and major banks without any success. And even their custodian RBC was rumored to be looking at buying them, but turned them down. I guess it took about six months for them to finally find somebody who was willing to pay at least what they could claim was a billion dollar price tag, but was it really a billion dollars? So that’s another interesting aspect. There was some reporting, as I mentioned from RIAbiz about the details behind the pricing. Turns out it’s not a $1.4 billion deal. It’s really a $700 million deal with a series of balloon payments if certain performance marks are hit, there’s no guarantees. And this gives everybody an out. So the sellers, so Andy and his team can say, look, we did it, we sold for 1.4 billion we’re heroes, you know, congratulate us. But then UBS can say, if things don’t work out well, look, we didn’t really pay $1.4 billion, we never had to give them that other $700 million in balloon payments because they didn’t meet all the performance marks that they agreed to. So we got a great deal on this asset. So it lets everyone out of the deal.

Craig: Now, this is not the first time this kind of deal has been done. If you look at last year at a very similar acquisition Empower Retirement company made a billion dollar acquisition of another robo advisor, Personal Capital, which also wasn’t a billion dollar deal, it was an $825 million deal with $175 million in incentives. Now that’s an interesting comparison because it’s also a robo advisor and close to the same amount of money, 825 versus 700. But if you look under the covers, it’s a very different group of of assets. And almost makes you wonder if UBS overpaid for Wealthfront.

Craig: In Empower paid $825 million for Personal Capital, they only had $19 billion in assets versus Wealthfront has $28 billion in assets, but that’s a set value for those assets. What Personal Capital has that Wealthfront does not is 2.5 million registered users on their platform of their aggregation and personal finance tools. That’s a pretty big group of users that can be monetized for other things, sold other services, tracked, that data can be sold. So there’s value to that asset, that Wealthfront doesn’t have. They do have 440,000 clients for their $28 billion, but that’s still way less, that’s 1/6 of the number of users of Personal Capital. Now Wealthfront has received $204 million in financing since then, and Personal Capital received $265, which was surprising. I really thought the numbers would be reversed, but when I looked into it over Crunchbase, so you can check these out Personal Capital, $265 million in funding Wealthfront $205 million. Still not the great return that the VCs normally want. They’re looking for 7-10X, so 3X their money is basically a loss when you look at how long the money’s been sitting in there, I would think the VCs are really not happy about getting that type of return.

Craig: Tim Welsh president of nexus strategy in RIAbiz said something similar. He said, “they must be hiding in a corner hoping no one notices they sold their disruptive platform to 160 year old bank and warehouse. The irony is very rich here. These are the very same people they came to dethrone.”

Craig: So true. It’s so true. It’s even more ironic considering how many times Andy Rachleff has disparaged, not only financial advisors, but banks recently. And that leads me to the next point, which is that Wealthfront became a bank. So they made another pivot in a long series of pivots, which I don’t think is bad firms have to pivot. You’ve gotta change. The market’s gonna change. You can’t play the same game because the rules change. So you need to change. There’s nothing wrong with changing, the problem is that you need to eventually be successful with one of these changes, or you’re going to have to basically sell the house. So they pivoted from a financial advice firm from, as they said, democratizing access to sophisticated financial advice to a bank.

Craig: In 2019 Andy was at the InVest conference and gave us a bunch of quotes. They had their pitch of self-driving money that they’re now a bank they’ve got checking accounts, direct deposits, and they they’ve got algorithms that can help investors and their clients pay their bills more efficiently, move their money around more efficiently, put into a high yield savings account. All sounds good, interesting stuff. We’re always open for innovative ideas to see if it’ll work, but the disparaging remarks that Andy made about banks have got to come back to haunt him. Some of the things he said, and I tweeted about from the InVest conference in 2019, “banking is one of two industries with negative net promoter scores, cable companies are the other”, “banks run their businesses for their shareholders, not their customers. This is what holds them back”. Then he said, “there’s 50 million customers of retail banks that will eventually leave for a better solution over the next decade”. I think he got that number from 30% of the 180 million people with bank accounts never go to a branch, and those are the ones that he’s going to target to go to his new bank which clearly didn’t happen, but it’s possible.

Craig: So then they made another pivot even more recently with the success of Robinhood that they start to offer crypto trading and more self-directed options for clients, giving the clients more options and more functionality. Again, lots of different options, lots of different things they were trying to do to make this successful. They just could not get enough growth, could not bring in enough revenue to keep people happy and raise the valuation at all. And one of the reasons why they were pivoting so fast was that their growth was really slowing.

Craig: Back in 2019 when Andy was at the conference, they had $20 billion in AUM and when they just sold, they had $28 billion. That’s like 30% growth over two years, sounds good, but if you look at the RIA market, it’s lagging. The average RIA grew their assets by 22%, I believe over the past two years. So Wealthfront was really lagging the market in many ways, not just revenue, but in AUM. So they needed to sell, these different pivots weren’t working, they weren’t bringing enough new clients.

Craig: Speaking of pivots, Andy Rachleff was on a podcast in May 2020 called the Lend Academy with Peter Renton, where he asked them about their pivots, and he said, “well, I wouldn’t call it a pivot”, which was the banking pivot, he said, “I would describe Wealthfront as a next generation banking service” which is interesting. You’re kind of grasping at straws here to try to find something that’s gonna attract people to your company.

Craig: So we talked about the price a bit. One of the things that we think with Wealthfront and the reason I compare them to RIAs is they’re really just an online RIA for much of their business life before they became a bank. And if you look at the RIA market, with $28 billion that doesn’t even put them in the top 10. Now it’s good, they’re like 11 or 12, so it’s not bad, but they’re not even the biggest RIA. They’ve really got a long way to go to be successful, which is another reason why they had to sell.

Craig: So why would UBS even buy Wealthfront? Well if you look at some of the press reports and some of the things that have been leaking out, they’ve been trying for years to offer digital advice solutions. UBS launched something called Smart Wealth in the UK in 2016, but shut it down and sold it to SigFig. That deal probably helped them learn more about SigFig and which they eventually took an equity stake in later that year, and then agreed to use their software to open up a US robo advisor, and that was their platform for for that. They were using SigFig for that platform, and that’s been going well for a while, but clearly not quite as well as they thought or else why buy Wealthfront. If your SigFig relationship is doing well, there’s no reason to look at Wealthfront unless you’re gonna merge them together, which really makes no sense.

Craig: UBS called their US digital advice program Advice Aadvantage. They invested in SigFig, launched their robo advisor, and recently in their October earnings release UBS said it wanted to provide a seamless digital experience with remote human advice. So some sort of hybrid platform, and that was from Scott Smith an analyst at Boston based Cerulli Associates.

Craig: One thing I was reading that was interesting that kind of leads me to think about this whole problem with Wealthfront and why they had to sell was from a newsletter called FinTech Takes by Alex Johnson. You can look him up on Twitter @AlexH_Johnson or FinTechTakes.com and his newsletter this week was talking about fintechs and the distribution versus manufacturing dilemma. “Building a successful FinTech company, or any company really, comes down to manufacturing and distribution. Can you build a compelling product that people want? And can you find can you distribute that product reliably and efficiently,” Alex writes.

Craig: So manufacturing and distribution, the two challenges that every founder wrestles. With the question that’s interesting is which challenge do you start with? So Andy Rachleff and Wealthfront started with manufacturing. They built everything from scratch. They built their tech platform. They built their company and then raised VC money to try to buy distribution, drive distribution of their product. And it was moderately successful, “but once the market reaches maturity, the key to winning isn’t in the manufacturing or the building of the product, it’s in the distribution”, and that’s in many different industries, and certainly in wealth management, being bigger gives you so many advantages. You need to hit certain plateaus or to keep up with your competitors who can deliver cheaper, faster or better.

Craig: So Wealthfront was really besieged on all sides by competitors, whether Vanguard and Schwab launching their own robos and sucking up assets, or these self-directed firms like Robinhood and M1 Finance offering new stuff. There’s even a company that just announced the other day called Compound, came out of stealth mode with $37 million in funding VC funding. They mix human advice with a technology approach, the next generation of wealth is holding a different suite of assets, one that traditional wealth management is often struggling to support, that’s Compound. You can check them out. So there’s always new ones coming out that are attracting their core client base of the 25-54 year olds, millennials under 40, and it was just became too much at some point, and that they need distribution, and where can they get distribution? A wire house.

Craig: UBS has got tens of thousands of clients, 10,000-15,000 advisors. They’ve got the distribution, they’ve got product. They can make this work if anyone can make it work. So that’s really where they came to with a mature company and they’ll be morphed into something either some form. And that’s really where they had to go in order to take this to the next level and do the right thing, both for their employees and their customers, which is what Andy Rachelff did. Now question we we were talking about oh, I talked about the, the pricing bit. Okay. So that’s done then six lingering questions following UBS’s blockbuster purchase of Wealthfront. This is an article from my good friend, Ryan Neal FinancialPlanning.com. Great article really interesting stuff here.

Craig: I’m just gonna read a couple out and talk about some of his questions, which I thought was a really good way to position this news. So what will happen to UBS’s current roboadvisor program powered by SigFig, which we just talked about the Advice Advantage. So there’s two questions, what should happen and what is likely to happen. So if you ask me, you wanna shut down the SigFig program, there’s no reason to have two roboadvisor programs, two digital advice programs. Even if you do one hybrid and one not, you don’t want to keep them, you want them on separate tech platforms. It makes no sense. So either you shut down Wealthfront and roll the assets over in SigFig or vice versa. Although I would suspect knowing what I know a little about SigFig, that maybe they would do the opposite and shut SigFig down and roll that over into Wealthfront.

Craig: I don’t know what’s gonna happen. I have no insider information. However, what I find is it’s often political that politics usually trumps common sense or what’s best for the company in the long run, because people don’t wanna shut down their babies. So if the CEO or different heads of the company leaders have brought in a particular technology, and then they buy something else, usually they’re going to defend what they bought or what they built, and the newcomer gets, gets hammered. But in this case the former CEO is gone, but replaced by Ralph Hammers and Rich Steinmeier, who was head of the wealth advice center is now divisional president at LPL. So both of those leaders have moved on, there’s really no one standing the way of shutting down the SigFig program and rolling that over into Wealthfront, which is what I would recommend again, not knowing any more details about what’s going on at the company.

Craig: Did UBS buy Wealthfront for the technology, the user base or a combination of both? So Michael Kitces, posted some of his back of the napkin calculations based on a 25 basis points fee on $28 billion, Wealthfront has about $70 million in revenue, which is UBS, means they’re paying 21 times revenue for the FinTech. So what does that tell you about what they’re buying? It doesn’t really tell you much about what they’re buying because it’s hard to evaluate the tech, the tech could be great, and they don’t have a lot of revenue or the tech could be crap, and they’ve got a lot of revenue.

Craig: I think it might be some combination, because again, UBS is a huge company. They don’t need $28 billion in assets that doesn’t do anything for them. They pick that up on a regular basis, they find that in their couch cushions, $28 billion. I would imagine it’s the combination of the people, the core to technology team, but they’re getting en masse and the technology that they believe they can use for their new Advice Advantage, or their new hybrid technology program, or some form of other programs that they believe they can sell. They’ve got their Wealth Advice Center, they’ve got their Workplace Wealth Solutions, there’s lots of the things that they can sell this into. There’s lots of other tools and lots of other options that UBS can use the Wealthfront tech for. So that’s where I see them hopefully doing that rather than throwing it away, they should be leveraging that into these other programs, which I think could be relatively lucrative for them.

Craig: Now we come to the question that I think we’ll decide whether this acquisition will succeed or fail. It is, how will Wealthfront’s, Silicon Valley culture fit in with a Swiss multinational bank? Wealthfront’s, long maintained a confrontational relationship with the traditional wealth management industry. And that is the understatement of the year. between previous CEO, Adam Nash, and Andy Rachleff, they’ve certainly been antagonistic to traditional wealth management, seeing themselves as the disruptors not only antagonistic to wealth management, but antagonistic to banks as well.

Craig: So this is definitely going to be an issue, and this is really where things will hinge. In my opinion it’s going to be the straw that breaks the camel’s back because, I’ve had a lot of people on this podcast, I’ve spoken to a lot of very successful people, people who have made really big deals, and one of the most important things in any merger or acquisition is culture. No matter how good the technology is, or how many assets you’re acquiring culture of the teams don’t mesh, if the culture of the businesses don’t mesh, you’re really gonna have serious problems and you have a high probability of failure because that’s really how things work. You just don’t bring a Silicon valley culture into a Swiss bank and say, okay, figure it out, everybody compromise and make this product work.

Craig: When you hear things from the current CEO, David Fortunado when he makes these crazy statements, “it was clear from the start that we shared the same values and culture”. What are you talking about? Nobody believes that. I mean, at least tell the truth, at least say, Hey, this is gonna be a problem. We are coming from one area, they’re somewhere else. We’re the Hatfields, they’re the McCoys, but we’re gonna make it work. But saying something like that, doesn’t help. UBS is a hugely profitable company, very good at what they do. Tey’re, they’re acquiring this firm and the odds they do everything they can to make this work, but don’t try to sugar coat it or gaslight people to say, we have the same values and culture. You certainly do not. It’s nothing like this at all.

Craig: Clearly everyone wants to make it work. Everyone wants us to, to, to, to to go well, and it’s gonna seem pretty smooth at first, they’re gonna keep things independent, but at some point, whether it’s a year or two years down the road, when the assets aren’t growing quick enough, or there’s too many departures of key people and the new people who are taking over don’t have the same knowledge, the same zeal, the same ideas, or the same leeway that Wealthfront had to pivot and change and increasingly change direction to eek every possible bit of assets out of their clients that then things are going to start getting a little messy and you might see UBS doing what Vanguard did when they launch their their robo, which is just shift money over from one pocket to another to make it look like they’re doing something.

Craig: They may turn this into some sort of Merrill Edge clone, where they can incentivize their advisors to ship small accounts over to the Wealthfront business which will goose the assets and make that look good. Begin a marketing campaign for the existing client base, maybe even lower the price. 75 business points is pretty high for what they’re offering. They can start pushing their own products into the mix, which will also goose profits profitability quite a bit. All these solutions will eventually happen in my opinion, and eventually they’ll retire the Wealthfront brand it’ll become just another wirehouse product. Unfortunately, that’s just the way things go. We’ll see how it goes. We always have high hopes for these, these mergers and this new stuff. But in the end, it, it boils down to dollars and cents, and someone’s gonna have to make a business decision as to whether things are working or not. And we’ll keep monitoring these guys and keep you updated as we go forward.

Craig: The bottom line is that this deal is gonna be known as one of the biggest culture clashes in the history of FinTech and it remains be seen, whether they can overcome the issues and make things work, or if it just gets filed away as, Hey, this was a good idea, but it just didn’t work out. And that’s the end of this episode. Thanks for listening. Glad you made it all the way through to the end. Hope you enjoyed what I had to say. Please go to our website, EzraGroupllc.com, scroll to the bottom of the homepage and sign up for our newsletter. Every month you will get an email chock full of wealth management, wealth tech, goodness news analysis, updates, links, all kinds of interesting stuff for you to share and learn from. So thanks again for listening and I’ll talk to everyone again next time.

Click here and schedule a Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.

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The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com

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