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Letter from America: Wealthfront, Robinhood, Ellevest

Prominent robo advisors in the U.S. continue to pursue B2C at scale.



The biggest challenge to digital wealth companies in the direct-to-consumer space is the forbidding cost of customer acquisition, even in a country as big as the U.S. But the leading robo fintechs are doubling down on their B2C models by expanding into new business segments. DigFin attended a CB Insights conference in New York to hear some of their stories (click here for our report on U.S. fintech lenders).

Wealthfront: growing pains
Wealthfront is too young to be iconic, but it is a symbol, as the first robo-advisor. It now boasts $11 billion of assets under management. But can its millennial-focused business provide more complex services as its customers age?

Doubters point to the fact that Charles Schwab, the online broker, launched its own robo advisor that now boasts $25 billion of AUM. Andy Rachleff, Wealthfront’s founder, says 85% of the company’s clients are under the age of 45.

“Schwab doesn’t have millennial customers,” he said. “Their average client is 58 years old.” He says only $2 billion of Schwab’s $25 billion AUM is from new clients.

He takes a different tone with regard to Vanguard, whose own robo-based AUM this year surpassed $100 billion, despite having been launched just in 2015.

“We aspire to be like Vanguard,” Rachleff said. “We use a lot of their products. They’re phenomenal. They’re the only financial service company we know of that puts the client’s interest first.” But, he added, their designers are stuck in old-school finance: “Their website looks like something from 1997.”

He thinks the bigger threat to Wealthfront would be if Amazon gets into robo investing than anything out of a bank or broker. The firm’s response is to make itself more relevant to its customers as they age and their needs get more complex. That means using tech to provide services at Vanguard-level prices – from financial planning to, most recently, basic banking services, letting people borrow against their managed assets. (The company has come under criticism for its latest, higher-fee “risk parity” investment strategy, but Rachleff says it hews to the commitment to passive investing.)

“Our vision is for our customers to never worry about their finances,” he said. “It’ll take us a few years, but if we can do that in a way that’s effortless and convenient, why wouldn’t you use us?”

But to reach that point, the company needs to keep growing quickly, because it is still unprofitable; and to become a broader financial provider, it needs open banking, so it can get access to customers’ data, which may require regulatory changes. Banks in the U.S., Rachleff noted sourly, refuse to make their data available.

Robinhood: money for nothing
This company began offering free online securities trading but it grabbed headlines at the beginning of this year with its move into crypto. As with stocks and options, Robinhood offers zero commissions on trading major digital coins. And just as it has forced online stock brokers like Charles Schwab and E*Trade to cut their fees, Robinhood CEO Vlad Tenev expects to see similar declines in what crypto exchanges and OTC brokers charge.

The crypto move was really about client acquisition, to get a new and younger set that might not have considered traditional securities. Robinhood makes money from margin trading, and charging interest on the cash or stocks it holds for customers. “The primary goal [of offering crypto trading] is to get people into the ecosystem,” Tenev said. “People are opening an account for crypto, and then going into equities or options, or upgrading their service level.”

He also believes the advent of his company is putting a lot of pressure on brokerages, which have already lowered their commissions, forcing them to find efficiencies in order to maintain profitability. But that means being able to compete with legacy systems against Robinhood’s lean tech stack, as well as laying off people and competing against Silicon Valley for engineering talent.

“We make a lot less money per customer than our competitors, but compensate with volume, efficiency and automation,” Tenev said.

He won’t disclose whether Robinhood is profitable, but at the start of the year it raised $360 million in a Series D round that valued the company at $5.6 billion, so it’s got investors demanding a high return. To meet that, Robinhood is racing to acquire customers and to introduce new products.

Ellevest: robo for women investors
Founder Sallie Krawcheck says people assumed a woman-focused robo advisor would be dumbed down. “Not a single person thought it would be smarter,” she said. Critics also questioned why a business should focus on women: isn’t investing just investing?

No, says Krawcheck, the former private-bank CEO at Citi, Smith Barney and Merrill Lynch. Women don’t invest as much as men, they earn less, they live longer: their needs are different. Ellevest’s algorithms take this into account when it provides advice.

But money is power, and women control trillions of investible assets and dominate consumer spending. “Women don’t need ‘empowerment’,” Krawcheck said. “Just by using our money, we can drive change. But women lack information or the knowledge of what to do with it.”

Like the other robo advisors in this report, Ellevest is quickly moving from its original mission of robo advice to financial planning and other services. The company launched in 2017 and recently passed $100 million in assets – making it a far cry from a Wealthfront, but Krawcheck says it is growing faster, spurred by a social reaction against brogrammers like Uber’s Travis Kalanick and a certain you-know-who in the White House.

Krawcheck is a great promoter; unfortunately she didn’t talk about the more mundane, brass-tacks aspects of the business (nor was she asked).

But she’s quote gold:

“Wall Street calls itself a meritocracy but it’s actually a mentocracy. Don’t get me wrong, I love men; I’ve been married to a couple of them. This is about including women and being clear-eyed [Wall Street’s firms] are not meritocracies. Wall Street serves men better. So where’s the change going to come from? Either women band together internally or the people who fund the system force change.”

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