Wall Street and the problem of “way too many publicly traded fintechs”

Wealthfront app.

Source: Wealthfront

In this weekly series, CNBC takes a look at companies that made the inaugural Disruptor 50 list, 10 years later.

A decade ago, the idea that an investment industry customer preferred to never speak with a human being seemed questionable. But it was among the soundbites from the robo-advisory firm Wealthfront, which came to market with backing from elite Silicon Valley firms and financial industry luminary Burt Malkiel, author of “A Random Walk Down Wall Street,” among its top executives.

Wealthfront racked up some notable clients in those early days too, such as the San Francisco 49ers of the NFL, as well as employees at Facebook and Twitter who experienced windfall wealth from IPOs. But it was never just about the celebrities or tech employees. Wealthfront was designed to reinvent the investing process for millennials first attempting to grow their wealth as a demographic increasingly choosing to conduct all aspects of their lives online. As then-CEO of the company Adam Nash said in a 2014 blog post, “Millennial investors have overwhelmingly made us the largest and fastest-growing automated investment service in the country.”

At the time, Wealthfront had $1.3 billion in assets under management “from clients in almost every imaginable profession living in all fifty states,” Nash wrote, and planned to “extend the benefits of automated investing to an even broader millennial audience.”

Earlier this year, Wealthfront was sold to UBS for $1.4 billion.

What happened in between? The reality of trying to upend a financial services business which was ripe for disruption, but in which the spending and brand power of Wall Street incumbents is difficult for any firm, even a successful one, to overcome. More coverage of the 2022 CNBC Disruptor 50

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A very tall French warehouse robot coming for the jobs we can’t reach How America’s towns and cities are getting a climate retrofit View More Wealthfront’s January sale was preceded by Personal Capital’s $1 billion sale to Empower Financial in 2020, and left Betterment alone among that first generation of stand-alone robo-advisors that a decade ago were poised to upend the investment world.There were many things the robo-advisors got right. For one, more investors have become comfortable conducting their financial lives online. They also were early to adopt the benefits offered by exchange-traded index funds in creating diversified portfolio solutions for investors that were available at a low cost. But their evolution also demonstrates how tough it is to build economies of scale and marketing might in a wealth management business with low margins and high costs of customer acquisition already dominated by investment giants like Vanguard and Schwab, and Wall Street banks.Wealthfront achieved real scale from that milestone 2014 $1.3 billion in assets, growing to roughly $27 billion in assets under management at the time of the UBS deal. But compare that to Vanguard, with roughly $200 billion in its digital investment platform, and Schwab, at $60 billion.As David Goldstone, who has tracked the space for years in the Robo Report and is an investment manager with Condor Capital, told CNBC earlier this year, “It’s always been a much easier road for incumbents.”Disruption can achieve its highest distinction — and hurdle to overcome — when the incumbents co-opt the concept. And that’s what has happened in digital investment management.Robinhood is another example. Its disruptive idea of free stock trading was a significant challenge to the status quo in the brokerage industry, but it quickly became the norm, with every major player from Vanguard to Schwab and Fidelity adding free trading. And then it becomes a game of scale and spend, a tough road for independents in the high-cost, low-margin financial industry. And for start-ups, it becomes a question of what you disrupt next. Wealthfront expanded well beyond its core ETF portfolios service, offering high-yield savings accounts, lines of credit, direct indexing, and cryptocurrency trust investing, but its underlying disruption — making investing […]

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