Six lingering questions following UBS’s blockbuster purchase of Wealthfront

Wednesday’s announcement from UBS that it plans to acquire Wealthfront for $1.4 billion in cash was shocking, but it wasn’t altogether surprising.

We’ve known since November that the digital advisor was seeking a sale at a $1.5 billion valuation. And though potential buyers were mere speculation, UBS CEO Ralph Hamers broadcast his desire to boost the bank’s offering for affluent investors during an October earnings call. Hamers talked about plans to launch a new robo advisor and wouldn’t rule out making an acquisition to do so.

“Organic growth is basically the default,” Hamers told Bloomberg. But “if there is an inorganic option that could accelerate us into that direction, we would certainly consider it.”

He even teased an organization-wide “strategic update” coming Feb. 1, so I guess we know what that presentation will be about.

Still, the news was shocking to those of us who have followed Wealthfront closely over the years. Even as competitors like Betterment pivoted into working with traditional financial advisors instead of in competition, Wealthfront remained steadfast in its goal to revolutionize financial services with purely digital advice.

CEO David Fortunato may say that the robo’s “philosophy and principles remain the same,” but the sale to a big bank is a huge change. There are still a lot of unknowns for how this will all shake out, and here are some of the biggest questions facing the companies:

Financial Planning sent these questions to both companies. UBS declined to comment, and Wealthfront has not responded. 

Why was Wealthfront silent about replacing Andy Rachleff as CEO almost a year ago? 
In 2016, Rachleff, a co-founder of Wealthfront, quietly replaced Adam Nash as CEO. It appears the company took a similar approach in the spring of 2021, with Wealthfront President Fortunato stepping in for Rachleff without any announcement from the company.

Both executives updated their LinkedIn profiles to indicate the transition took place in March, with Rachleff moving to the role of executive chairman, but it was the first that many industry reporters and analysts (including yours truly) heard about the change. Articles covering Wealthfront attributed the CEO title to Rachleff as recently as November, when it was revealed the company was exploring a sale, without correction from the company.

Why the silence about such a major change in executive leadership? Some speculate the move could be related to Rachleff reportedly failing to secure a deal with RBC, which provides custody and clearing services to Wealthfront, or go public with a SPAC.

What happened to UBS’s previous robo-advisor powered by SigFig? 
UBS already had a digital advice program. In 2018, nearly two years after making an investment in SigFig, which builds robo advisors for large financial institutions like Wells Fargo, UBS rolled out UBS Advice Advantage. It offered hybrid digital advice at a $10,000 minimum investment and 75 basis point management fee.

Will UBS continue operating both, integrate the products or discontinue the relationship with SigFig? Alois Pirker, director of the wealth management practice at Aite-Novarica, told WealthManagement.com that it likely closes the door on that previous relationship. However, Wealthfront’s existing user base and AUM makes it “fundamentally different” from the Advice Advantage, and UBS could try to differentiate the offerings, according to David Goldstone, manager of research and analytics at Backend Benchmarking.

“It is possible they will retain Advice Advantage as a hybrid offering while integrating Wealthfront as the digital-only option,” Goldstone told Financial Planning. “This integration of Advice Advantage and the greater UBS wealth business with Wealthfront will be a challenge for UBS.”

Did UBS buy Wealthfront for the technology, the user base or a combination of both?  
Given that UBS already has robo advice technology, Goldstone believes the $1.4 billion price tag is primarily about acquiring Wealthfront’s customer base. Wealthfront’s $28 billion AUM is a drop in the bucket compared to UBS’s $3 trillion, but the assets and number of clients (470,000) aren’t trivial. Wealthfront’s consumer-facing brand could open distribution opportunities for UBS investment products, which was BlackRock’s strategy behind buying FutureAdvisor. It may also jumpstart UBS’s plans to expand among younger, smaller investors.

Some napkin math by XY Planning Network co-founder Michael Kitces estimated that charging 0.25% fees on $28 billion AUM would give Wealthfront a revenue of roughly $70 million, meaning UBS is paying 21-times revenue for the fintech startup, though Wealthfront likely has other revenue sources besides management fees. The price tag is in line with other notable digital advice acquisitions, such as Empower Retirement’s $1 billion for deal Personal Capital. 

So beyond clients, UBS could see potential in deploying Wealthfront’s technology to existing UBS clients or in cross-selling across banking and investments. When announcing the purchase, UBS said it plans to incorporate Wealthfront into its Wealth Advice Center, which serves affluent clients, and Workplace Wealth Solutions, which offers retirement plan programs and financial education to employees of UBS’s corporate clients. UBS could also be interested in Wealthfront’s direct indexing technology, which became a hot commodity in 2021 as asset managers across the industry snapped up fintech startups.

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How will Wealthfront’s Silicon Valley culture fit in with a Swiss multinational bank? 
Wealthfront has long maintained a confrontational relationship with the traditional wealth management industry. When Rachleff took over as CEO, Financial Planning reported that he was expected to bring a “combative approach,” and he certainly lived up to the reputation.

“Everyone hates their cable guy, and everyone hates their banks,” Rachleff said at Arizent’s 2019 INVEST conference. And speaking at CB Insights’ Future of Fintech conference in 2020, he dismissed financial advisors as outdated and expensive, and said the increasingly popular hybrid model of combining human advisors with automated investment management “hasn’t worked at all.”

Now the company is taking the Silicon Valley ethos of “move fast and break things,” which has gotten the firm in some regulatory trouble in the past, to a very traditional bank. UBS also plans to incorporate human advisors to the company that in the past was staunchly digital-only. How the cultures mesh could play a significant role in the success or failure of UBS’s acquisition.

How hard will UBS push proprietary investment products? 
On Twitter, Cambria Investment Management co-founder and CIO Meb Faber asked, “How long until we see higher fee UBS funds added to Wealthfront portfolios after the transaction closes late 2022?”

The poll received 107 votes, so small sample size is in effect, but 41% guessed it would happen in three to 12 months. A quarter guessed it would happen sooner, 20% said longer than a year, and 14% said never. As for Faber: “I'm in the minority. I think they don't mess with portfolios (unless UBS plans to roll out [a] suite of low-cost ETFs which they currently don't have).”

However, UBS’s own announcement makes it unlikely that it won’t include at least some of its own products into the robo advisor. While Fortunato said clients won’t see any changes in their current service, he did say they can look forward to “benefiting from UBS’s breadth of products, services and intellectual capital.”

Will Wealthfront’s customers stay? 
Between cultural alignment and investment products, it’s not necessarily a given that UBS will be able to retain Wealthfront’s client base. A significant part of Wealthfront’s pitch to retail investors was its anti-Wall Street approach, and given the pushback Wealthfront received over pushing some clients into a controversial risk-parity fund, at least some users may bristle at seeing UBS products pop up in their portfolios.

“One of the attractive things about Wealthfront is that it was not a traditional, legacy advice firm,” Goldstone said. “Some clients may not be excited about becoming a UBS client overnight.”