PALO ALTO, Calif. -- Expecting that your current clients' young adult children will, in turn, become clients in their own right? Wealthfront is betting that you're wrong.
The biggest online-only RIA -- with $1.4 billion in assets under management and 16,000 clients -- is staking its future on the approximately 86 million people born between 1981 and 2000.
"Millennials are everything to us," says Adam Nash, president and chief executive of 3-year-old Wealthfront, based in Palo Alto. "They are a huge generation looking for something different and they are driving our growth. Most of our clients are under 35, and they're interested in family, friends, careers and hobbies -- not in managing their money."
Silicon Valley investors have already poured $65.5 million in funding into Wealthfront, betting it can profit from a steep growth curve of millennial assets -- which Nash estimates will rise from over $1 trillion now to around $7 trillion in five to seven years.
EMERGING MARKET
The way Nash sees it, Wealthfront can become the "leader in a new emerging market" if it rides Gen Y's financial service needs. The model, he says, is Charles Schwab, which zeroed in on baby boomers and grew to hold $2 trillion in client assets as of last year.
"We're building a company that takes care of millennials early," Nash says, adding that Wealthfront just lowered its minimum client age to 18. "If we do a good job, they will stay with us for a long time."
Millennials are looking for automated investment services, low cost and a passive approach to the stock market, Nash says. The company provides automatic rebalancing, asset allocation and tax-loss harvesting, and concentrates on passive investment strategies using ETFs; clients pay nothing for the first $10,000 and 25 basis points on everything above that.
While aiming at a younger clientele, Wealthfront's executives include some venerable names from the investing sphere -- including Burton Malkiel, the author of A Random Walk Down Wall Street and the firm's chief investment officer, and executive chairman Andy Rachleff, a veteran venture capitalist. (Other executives are Silicon Valley vets: Elliot Shmukler, senior vice president of product and growth, held a similar position at LinkedIn; and Ali Rosenthal, who worked on business development at Facebook in its formative years before becoming chief operating officer at MessageMe, is joining the company this month as head of strategic partnerships.)
HARD REALITIES
Skeptics, however, say the hard realities of creating a business with positive cash flow remains daunting.
"The burn rate for that kind of business, which has to hire dozens of well-paid engineers along with other costs and is only making around $3.5 million in revenue, based on their AUM, has to be substantial," says a veteran Silicon Valley executive who asked not to be identified. "How many assets do you have to have before you're making money and you're a real business? It's a very, very big number and it's not a very good business model."
Nash acknowledges that a good portion of Wealthfront's spending is going toward talented software engineers, who don't come cheap in Silicon Valley. "It's a hard problem," admits Nash.
Still, he maintains that when Wealthfront reaches its break-even point "is up to us," Nash counters. "We're still very much in the early growth and investment phase."
And those engineers -- who tend to come from the same generation as Wealthfront clients -- are worth the investment, he argues. "The more high-quality talent you bring in, the more you can attract," Nash says.
"People with in-demand skills prioritize two things: who they work with, and what they work on."
Indeed, many of the firm's hires are also evangelists for the company, he adds. "If you talk to someone who works here, they'll probably tell you about someone they know who needed financial help, and they believe software is the answer, and that having high fees and high minimums are not written in stone."
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