Wealthfront’s mutual fund spurs industry critiques

Yet another Wealthfront announcement has become a magnet for industry criticism.

Months after filing plans for a mutual fund offering, the Silicon Valley-based robo advisor officially announced the launch of its Risk Parity fund.

Modeled after Bridgewater Associates’ All Weather fund, Wealthfront hopes to leverage its technology to offer a similar model without the $100 million account minimum, the firm says.

“The most sophisticated strategies can be deployed via software in a cost-effective manner,” says Jakub Jurek, Wealthfront’s vice president of research. The Risk Parity fund invests in global developed and emerging market equities, fixed income, real estate investment trusts and commodities, according to a filing with the SEC.

Wealthfront, the second-largest independent robo managing over $10 billion in assets, said it will increase clients' after-tax returns by adding alpha into portfolios while maintaining the same level of risk.

However, advisors and investors were quick to question several aspects of the fund’s launch, characterizing it as being cut from the same cloth of Wall Street practices that Wealthfront has regularly criticized.

For one, the fund automatically signs up qualified accounts (clients with taxable investment accounts starting at $100,000) raising questions about how Wealthfront will determine suitability. Eligible clients have until March 8 to opt out.

“Why does it cost more if it’s ‘passive’?” wrote Maksim Ioffe using the Twitter handle @maksim_ioffe. “Why are your (qualified) customers automatically opted into this product and its higher fees?”

Others suggested the move is being done to boost the firm’s own in-house fees. “It’s by some margin the most expensive fund that Wealthfront puts its clients into. And it’s the fund where the fee goes directly to Wealthfront itself,” writer Felix Salmon noted on Twitter using the hashtag @felixsalmon.

Wealthfront’s proprietary product may even skirt its fiduciary duties, according to other commentators. “Wasn’t that exactly how the wirehouse private wealth groups used to work, too? This is a sales contest golf trip short of a regulatory violation,” wrote Robert Clark using the handle @rfcdealflow.

Wealthfront did not respond to requests for response, but in a tweet, it said it "only built [the fund] because no option was available at a reasonable cost and minimum."

The firm has faced other critiques as of late. A tweet from Wealthfront CEO Andy Rachleff commenting on the platform's performance was assailed by critics, and the robo (and other digital platforms) was lambasted for being inaccessible at points during the market correction in February.

With the mutual fund, the SEC filing notes that "[it] is not suitable for all investors,” but instead only for those “who (a) understand the risks associated with the use of derivatives, (b) are willing to assume a high degree of risk, and (c) intend to actively monitor and manage their investments in the fund.”

These funds are not intended for the average robo investor, says Davis Janowski, an analyst for Forrester. And that’s the point.

“Twitter [commentators] talk about how it’s not straight forward and seems pernicious, but this isn’t targeted at the low-end typical investor who’s just starting out,” Janowski says. “This is for the well-off investor that has a sizable, taxable account.”

Instead, the fund is just another product aimed at the specific client base that Wealthfront targets — HENRYs, or high-earners, not rich yet.

“What little paid marketing they do is focused in the Valley,” says Janowski, who worked for Wealthfront from 2013 to 2015. “Their target audience is a mix of just-starting-out, successful engineers and entrepreneurs and startup tech people many of which found the model of passive index investing appealing.”

Some of those target clients may have already reached the upper echelon of assets, Janowski says, and are looking for a more sophisticated digital platform.

The announcement comes on the heels of a recent $75 million capital raise for the digital platform in January. Wealthfront currently manages $10 billion in client assets, a figure which doubled in 2017, says the firm.

However, even staunch supporters of the startup expressed doubts about the firm’s new proprietary product.

“I’m not a very knowledgeable investor but I’ve always trusted Wealthfront because they typically make a very clear and compelling case why their new products are beneficial,” wrote Matt Gallivan using the hashtag @mgallivan. “This is the first time I feel swindled by them and it really bums me out.”

For Janowski, the new product is all about differentiation. Take Wealthfront’s last product announcement, Path, a planning tool that helps clients buy their first home, he says.

“It’s extremely hard to find a reasonable rental in the Valley, let alone something to buy,” Janowski says. “That’s a huge problem for their client base. The bells and whistles these robos are putting in are there to help their clients.”