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During his days as a venture capitalist, Andy Rachleff spent much of his time listening to young entrepreneurs explain why their startups were going to hit it big. Now he’s the one doing the pitching. As chief executive of Wealthfront, an online-only financial advisory firm, Rachleff has stood in front of crowds of employees at Facebook (FB), LinkedIn (LNKD), and other companies to sell his financial management services. “We add very little value, and we price accordingly,” he tells them.
That anti-pitch is tailor-made for Silicon Valley tech workers, especially the newly rich and soon-to-be-rich who work at companies about to go public. Rachleff, 53, figures that tech IPOs will create $500 billion in new wealth by 2016, and $100 billion of that will go to rank-and-file employees. Financial advice is a tricky sell in the Valley. The place is full of Ph.D.s with problem-solving skills, an unusually strong aversion to fees, and no clue what to do with their money. “The common refrain we get from people at companies that are going public is, ‘How do we get those suits out of our lobby. We can’t stand those f - - - ing guys,’ ” Rachleff says.
Wealthfront’s software applies what Rachleff says is a prudent diversification strategy to balance investors’ portfolios among equities, bonds, natural resources, and three other asset classes, mostly in index funds. Customers hand over their cash, answer a questionnaire about their financial goals, and Wealthfront handles all the trades and portfolio balancing. The minimum investment is $5,000, and the fee is 0.25 percent of assets per year. That compares to the $1 million minimum and 1 percent-plus fee of a typical wealth manager. When Rachleff was a VC—he retired from Benchmark Capital in 2004—he was struck by how few of the entrepreneurs he was backing had access to any decent financial advice. “I could never advise young people at our companies to do what I did because they couldn’t afford the minimums,” he says.
The firm’s roots go back to 2008 when Daniel Carroll, a then-27-year-old debt analyst from Chicago, found that his mother’s adviser had her invested in high-risk mutual funds, with fees of more than 1.5 percent. With his mother two years from retirement, Carroll says, “I ripped all of her assets back and sat down with pencil and paper to figure out a better portfolio.” Carroll soon created an online virtual portfolio program to manage his mom’s money. Having read about Rachleff in magazines, Carroll cold-called him and pitched his idea: Starting a company that offered inexpensive financial advice. A few days later the two were breakfasting at Buck’s, a Woodside (Calif.) eatery favored by Valley dealmakers. Rachleff agreed to become CEO of the startup, which they first named KaChing.
The company built a social game for investing in which customers competed to see who had the highest returns. It flopped. Of the 450,000 people who signed up to create their own portfolios, only a handful came up with winning strategies, says Rachleff. A year later they dropped the DIY approach, and the KaChing name, and began pushing a follow-the-expert model: Customers would put money into an account, and Wealthfront would let them mimic the portfolios of professional investors, trade for trade. Rachleff and Carroll found 44 pros willing to share their trades with Wealthfront users. This service also didn’t fly; the firm failed to attract many customers. Although the pros beat the Standard & Poor’s 500-stock index by 4 percent, “nobody seemed to notice,” Rachleff says. “The more you promise great returns, the less people believe you.”
Once again, Rachleff and Carroll changed business models, this time to focus on financially underserved geeks with money. The service opened for business in December. Rachleff won’t divulge specifics about the startup’s revenue, though he says it has thousands of clients who have, on average, more than $50,000 in their accounts. Less than 1 percent of them have dropped the service, he adds.
Wealthfront isn’t the only company intent on bringing financial advice to the Valley’s engineering class. Personal Capital takes a more traditional approach—human advisers help manage the funds. Betterment has no minimum balance, and a management fee in the same range as Wealthfront’s. The newest entry is Motif Investing, which creates portfolios around themes with catchy names such as Biotech Breakthroughs, Discount Nation, or Democratic Donors. Like Wealthfront, those competing services use plenty of engineer-enticing algorithms.
None of them, however, quite matches Wealthfront’s absence of human touch and do-no-harm message. One customer, Damien Filiatrault, the 37-year-old owner of Scalable Path, a small software company, says he isn’t clear how Wealthfront’s algorithms work but trusts the firm anyway. He has $20,000 in his account, and may put in more. “I’d tried mutual funds, and I’d tried managing things myself and didn’t like the result of either,” says Filiatrault. “If you don’t know who the sucker is, it’s probably you. I don’t try to win in that game. I’m good at what I do, and that’s what I should focus on.”
The bottom line: Wealthfront pitches money management to tech-industry employees, who may have $100 billion more to invest by 2016 after IPOs.