Burton Malkiel, Wealthfront CIO

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Re: Burton Malkiel, Wealthfront CIO

Postby Rick Ferri » Sun Mar 24, 2013 9:12 pm

nisiprius wrote:
tj wrote:there's a long disclosure, you can click the link and it pops up in a box...its underneath the bottom row of photos.

:!: :!: "Wealthfront does not know whether these clients approve of or disapprove of its services." :D


Now THAT'S interesting!

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Re: Burton Malkiel, Wealthfront CIO

Postby pascalwager » Sun Mar 24, 2013 10:02 pm

The interest payments on bonds are fixed. If inflation accelerates, so should AT&T's earnings and dividends, making the stock perhaps even less risky than the bonds. I am convinced that income-seeking investors will be better served owning a portfolio of dividend-paying U.S. stocks than they will be holding a portfolio of bonds in the same companies.


In light of the above 2011 statement by Malkiel, I was surprised to get a double-digit allocation to 7+ year duration corporate bonds when I used Wealthfront to create a portfolio for an IRA account. Otherwise, the portfolios I developed had "Malkiel" written all over them, based on his public comments and books--well, maybe not the natural resources fund.
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Re: Burton Malkiel, Wealthfront CIO

Postby grok87 » Mon Mar 25, 2013 9:47 pm

pascalwager wrote:
The interest payments on bonds are fixed. If inflation accelerates, so should AT&T's earnings and dividends, making the stock perhaps even less risky than the bonds. I am convinced that income-seeking investors will be better served owning a portfolio of dividend-paying U.S. stocks than they will be holding a portfolio of bonds in the same companies.


In light of the above 2011 statement by Malkiel, I was surprised to get a double-digit allocation to 7+ year duration corporate bonds when I used Wealthfront to create a portfolio for an IRA account. Otherwise, the portfolios I developed had "Malkiel" written all over them, based on his public comments and books--well, maybe not the natural resources fund.

very surprising. Long term corporate bonds are for suckers.
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Re: Burton Malkiel, Wealthfront CIO

Postby Editron » Tue Mar 26, 2013 10:36 pm

First-time poster here. I'm impressed by your knowledge and general skepticism, especially the longer post by Rick Ferri. I thought I'd add my two cents on Wealthfront.

I recently discovered Wealthfront while trying to figure out where to invest a rollover 401k and some other savings. I'm with E-Trade, and I'm paying .87 percent for a managed account. What attracted me to Wealthfront was the similar investment approach -- rebalanced index ETFs, plus "tax-loss harvesting" -- for a total of .40 percent. I took the quiz, created an account and just need to transfer the money. Now I'm having second thoughts, thanks to your posts about the business model. I also think I can do this myself for much less with Vanguard funds through E-Trade or directly through Vanguard.

By the way, I read the user agreement, and Wealthfront reserves the right to use your supplied image and name in any and all promotional materials.

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Re: Burton Malkiel, Wealthfront CIO

Postby tj » Tue Mar 26, 2013 11:47 pm

Wealthfront reserves the right to use your supplied image and name in any and all promotional materials.


This seems sketchy.
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Re: Burton Malkiel, Wealthfront CIO

Postby umfundi » Wed Mar 27, 2013 2:48 am

tj wrote:
Wealthfront reserves the right to use your supplied image and name in any and all promotional materials.


This seems sketchy.

Apparently not for Malkiel! :wink:

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Re: Burton Malkiel, Wealthfront CIO

Postby Rick Ferri » Wed Mar 27, 2013 3:23 am

Venture capitalists (VCs) have committed over $27 million to Wealthfront by my count. That might seem absurd given the fact that they have very little in assets ($170 million) and charge a 0.25% fee. A RIA of similar size and fee might be worth $1.3 million (3x annual fees).

I thought the VCs were nuts at first, then after thinking about this for a long time, and after visiting Wealthfront and meeting several people including Andy Rachleff, this might turn out to be good venture capital investment. Why? Because this a technology company first and an investment management firm last.

My predictions is that Wealthfront will sell to Charles Schwab or another large investment company for between $80 and $120 million in cash over the next 2-3 years. This won't be because they're a huge success at gathering assets. Rather, it will be because Schwab or another firm will see the value in the technology and be able to apply it across their entire platform. It's a wealth multiplier for Schwab or whomever.

Here's how I see Wealthfront (formally KaChing) and where I predict they're going:

1) I see Wealthfront as a technology company. They write software that's intended to change an industry - in this case, personal investing.
2) They're showcasing their software through an investment company (formally KaChing and now Wealthfront).
3) The company first tried to attract clients as KaChing by picking active managers begining in the fall of 2009.
4) Although "KaChing" reportedly attracted $100 million in assets in the first year, it's not enough to continue the model.
4) In October 2010, Rachleff does a 180 by adopting passive investing using exchange-traded funds (ETFs) and changing the name of the company to Wealthfront.
5) New business acquisition is slow They wait for Linkedin and Facebook IPO and capture some of that money, although not nearly the level anticipated. What's missing is credibility. Rachleff wisely brings on Burton Makiel as CIO and puts his touch on the portfolios and his face on the advertisements. Assets increase due to some good press. They also hire heavy-hitting former Linkedin marketing talent. This leads to round-two of $20 million in VC funding.
6) The company announces this $20 million is to be used to market the firm and improve technology (getting on with big custodians like Schwab would be a big improvement also, IMO.)

I believe spending $XX million in marketing will buy the company at least $1 billion in assets and perhaps $2 billion, but it won't buy $40 billion. That's the number Rachleff said he Wealthfront needs make this a VC success in it's own right (see my earlier post).

Here is the catch - Wealthfront doesn't need $40 billion to make the VCs happy, they may not even need $2 billion.

I say again, this is a technology company first and an investment management firm last. Wealthfront RIA is a showcase for software. It's the techology that makes the company worth worth $80-$120 million to Scchwab or another large boker-dealer. They can use the software as a force multiplier in different ways to attract many billion in assets and grow their own AUM.

That's the story behind Wealthfront, or at least the way I see it on this 27th day of March, 2013.

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Re: Burton Malkiel, Wealthfront CIO

Postby grok87 » Wed Mar 27, 2013 11:57 am

Rick Ferri wrote:Venture capitalists (VCs) have committed over $27 million to Wealthfront by my count. That might seem absurd given the fact that they have very little in assets ($170 million) and charge a 0.25% fee. A RIA of similar size and fee might be worth $1.3 million (3x annual fees).

I thought the VCs were nuts at first, then after thinking about this for a long time, and after visiting Wealthfront and meeting several people including Andy Rachleff, this might turn out to be good venture capital investment. Why? Because this a technology company first and an investment management firm last.

My predictions is that Wealthfront will sell to Charles Schwab or another large investment company for between $80 and $120 million in cash over the next 2-3 years. This won't be because they're a huge success at gathering assets. Rather, it will be because Schwab or another firm will see the value in the technology and be able to apply it across their entire platform. It's a wealth multiplier for Schwab or whomever.

Here's how I see Wealthfront (formally KaChing) and where I predict they're going:

1) I see Wealthfront as a technology company. They write software that's intended to change an industry - in this case, personal investing.
2) They're showcasing their software through an investment company (formally KaChing and now Wealthfront).
3) The company first tried to attract clients as KaChing by picking active managers begining in the fall of 2009.
4) Although "KaChing" reportedly attracted $100 million in assets in the first year, it's not enough to continue the model.
4) In October 2010, Rachleff does a 180 by adopting passive investing using exchange-traded funds (ETFs) and changing the name of the company to Wealthfront.
5) New business acquisition is slow They wait for Linkedin and Facebook IPO and capture some of that money, although not nearly the level anticipated. What's missing is credibility. Rachleff wisely brings on Burton Makiel as CIO and puts his touch on the portfolios and his face on the advertisements. Assets increase due to some good press. They also hire heavy-hitting former Linkedin marketing talent. This leads to round-two of $20 million in VC funding.
6) The company announces this $20 million is to be used to market the firm and improve technology (getting on with big custodians like Schwab would be a big improvement also, IMO.)

I believe spending $XX million in marketing will buy the company at least $1 billion in assets and perhaps $2 billion, but it won't buy $40 billion. That's the number Rachleff said he Wealthfront needs make this a VC success in it's own right (see my earlier post).

Here is the catch - Wealthfront doesn't need $40 billion to make the VCs happy, they may not even need $2 billion.

I say again, this is a technology company first and an investment management firm last. Wealthfront RIA is a showcase for software. It's the techology that makes the company worth worth $80-$120 million to Scchwab or another large boker-dealer. They can use the software as a force multiplier in different ways to attract many billion in assets and grow their own AUM.

That's the story behind Wealthfront, or at least the way I see it on this 27th day of March, 2013.

Rick Ferri

Thanks Rick for your thoughts. I agree.
I think one of the things you are pointing out is that alignment of incentives is key. The VCs motivation is to make a (quick) return on their investment. I think the scenario you have highlighted is the most likely- that they gather a Billion or so of assets and then sell out to someone. At that point fees would likely be boosted (in my view).

cheers,
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Re: Burton Malkiel, Wealthfront CIO

Postby afan » Wed Mar 27, 2013 6:21 pm

Rick,

Interesting thoughts, but I am afraid I have missed what Wealthfront brings to the table. Their software does not appear to be particularly valuable. I would think any large broker dealer is already able to generate asset allocation advice, and if they wanted software help, they could hire a couple of programmers to work that up for a lot less than $20M.

Wealthfront was still pushing active management when they were called Wealthfront. Not that I have any interest in being a client, but their about face would make me wonder where they will go next when indexing is not bringing in enough money. Will they go to enhanced indexing, add commodities, real estate, illiquid assets? Will they do another 180 and decide they were right the first time, and what we really need is help finding active managers? Will they provide the management and omit the middle men of other managers or mutual funds?

I found their advertising in their active management phase so dishonest that I could not consider doing business with them under any circumstances. But setting that aside, I don't see what they offer that would make the firm worth much of anything.
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Re: Burton Malkiel, Wealthfront CIO

Postby Rick Ferri » Wed Mar 27, 2013 6:38 pm

Sorry, I didn't explain myself well. It's not the investment management side that's valuable, it's the software side. The portfolios allocation that they offering clients are are nothing to write home about. Yes, Burton Malkiel anointed them, but that not going to make this company worth $100 million. Wealthfront the software company is worth something to Schwab (or even Vanguard). They have created good technology for the industry; account transfer, rebalancing, tax-loss harvesting software, client reporting, etc. Large firms can either recreate this wheel or buy it outright. I think a publicly traded company like Schwab would just step in and buy it for $100 million. They have done it in the past. With Wealthfront having a billion $ under management helps sell the company because there is immediate cash flow coming in. That's my view.

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Re: Burton Malkiel, Wealthfront CIO

Postby umfundi » Wed Mar 27, 2013 7:28 pm

Rick Ferri wrote:Sorry, I didn't explain myself well. It's not the investment management side that's valuable, it's the software side. The portfolios allocation that they offering clients are are nothing to write home about. Yes, Burton Malkiel anointed them, but that not going to make this company worth $100 million. Wealthfront the software company is worth something to Schwab (or even Vanguard). They have created good technology for the industry; account transfer, rebalancing, tax-loss harvesting software, client reporting, etc. Large firms can either recreate this wheel or buy it outright. I think a publicly traded company like Schwab would just step in and buy it for $100 million. They have done it in the past. With Wealthfront having a billion $ under management helps sell the company because there is immediate cash flow coming in. That's my view.

Rick Ferri


Rick, yes. But ...

(Sorry, but this is what I do for a living, opine on software and strategies.)

If Wealthfront's software is so good, why are they flailing about looking for a plausible investment strategy business model?

Is their software so good that if the idea is successful, its functionality cannot easily be copied?

If their business model is so good, is it so unique that it cannot be copied?

Would anyone in their right mind pay $100 million to get $1 billion AUM? At less than a 0.25% fee? I believe that works out to paying $40 for $1 of yearly revenue.

I agree that consumer-oriented financial software and web interfaces in general suck. The industry has no clue compared, for example, to gaming and porn. But, there's not enough consumer demand to do much of anything different. Ask MS Money and Financial Engines.

Please don't get me wrong. I am very much in favor of democratizing and simplifying low-cost investing. I just do not see that Wealthfront has any secret sauce.

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Re: Burton Malkiel, Wealthfront CIO

Postby Rick Ferri » Thu Mar 28, 2013 8:53 am

Keith

Technology value is the only way I can come close to the $100+ million exit value the VCs are expecting from this company.

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Re: Burton Malkiel, Wealthfront CIO

Postby nisiprius » Thu Mar 28, 2013 12:32 pm

Rick, whom do you think is the audience who is likely to know who Burton Malkiel is, and to be (properly) impressed by his participation? Wealthfront's client base appears to be young "mass affluent" high-tech employees. I don't think all that many of them would know his name, so he has to have been brought in to impress someone else...
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Re: Burton Malkiel, Wealthfront CIO

Postby Valuethinker » Thu Mar 28, 2013 12:36 pm

nisiprius wrote:Rick, whom do you think is the audience who is likely to know who Burton Malkiel is, and to be (properly) impressed by his participation? Wealthfront's client base appears to be young "mass affluent" high-tech employees. I don't think all that many of them would know his name, so he has to have been brought in to impress someone else...


I would hire Burton Malkiel because he would provide good advice....

And, as far as I know, he's been banging on about passive investing, global diversification etc. for longer than anyone else. Being a non USian, I first read A Random Walk Down Wall Street in about 1983. John Bogle and Vanguard was something I first encountered in the late 1990s (when the creation of Amazon.com suddenly meant I had access to US published books, that had not been published in the UK). Similarly the Web (invented by a Brit, Sir Tim Berners-Lee I might note ;-)) allowed me to actually see what Vanguard was doing, which was impossible until that point.
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Re: Burton Malkiel, Wealthfront CIO

Postby Rick Ferri » Thu Mar 28, 2013 12:47 pm

The company needed a brand-name in the mix. Burton Malkiel adds credibility to the investment process and I believe that his involvement has helped attract assets. He helped clean-up and enhance Wealthfront's original ETF portfolios, which were not well designed, IMO.

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Re: Burton Malkiel, Wealthfront CIO

Postby Toller » Thu Mar 28, 2013 1:04 pm

umfundi wrote:
(He looks for castles in the air built on firm foundations--that is, companies that have both good fundamentals and a romantic, exciting "story.")

Seems to me, also an apt description of the author. :?

Keith


I had him for accounting in 1974. He spent as much time talking about Chinese fairytales as accounting but I enjoyed the course and learned the material. So, yeah, it is an apt description of the author; at least 38 years ago.
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Re: Burton Malkiel, Wealthfront CIO

Postby tadamsmar » Thu Mar 28, 2013 1:11 pm

baw703916 wrote:
umfundi wrote:
I don't have the latest edition of A Random Walk Down Wall Street,


No one should accuse Malkiel of consistency in his contemporaneous investment recommendations. It's as though the revisions in each new edition (now the tenth, I believe) are akin to a newsletter.



I bought a much earlier edition, partly out of curiosity, but I like Bernstein's and Swedroe's books much better. But the problem I have is: how can it be a random walk if returns don't follow a normal distribution?
(I'm sure you will appreciate the objection).


A random walk does not have to follow a normal distribution. The only requirement is that each new step be statistically independent of the previous steps. A Gaussian random walk is just one type of random walk.
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Re: Burton Malkiel, Wealthfront CIO

Postby umfundi » Thu Mar 28, 2013 1:20 pm

Rick Ferri wrote:Keith

Technology value is the only way I can come close to the $100+ million exit value the VCs are expecting from this company.

Rick Ferri

I've put a note on my calendar to look at Wealthfront in a year. It will be interesting to see how this plays out.

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Re: Burton Malkiel, Wealthfront CIO

Postby Random Musings » Thu Mar 28, 2013 4:21 pm

Since the thought is that the techology value is the key (not AUM) - I would think Schwab or whomever can do it far cheaper than $100 MM.

It isn't a complicated model.

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Re: Burton Malkiel, Wealthfront CIO

Postby Valuethinker » Fri Mar 29, 2013 4:18 am

Random Musings wrote:Since the thought is that the techology value is the key (not AUM) - I would think Schwab or whomever can do it far cheaper than $100 MM.

It isn't a complicated model.

RM


Generally with disruptive innovation, it's not the market incumbents that create it.

You could argue IBM is the exception with the PC, but that almost proves the rule, because IBM never made a lot of money out of setting the industry standard-- the money was made by Compaq and Dell and Intel and Microsoft. IBM still makes a lot of its money out of its mainframe business, ie its core monopoly hardware and software business, that it has had for over 60 years.

So that's the thing to look for. How disruptive is it? And do the existing industry incumbents not do it because it would hurt their core business?

DEC was once number 2 to IBM in world computer companies. But it could not embrace the personal computer. It died.
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Re: Burton Malkiel, Wealthfront CIO

Postby umfundi » Fri Mar 29, 2013 4:45 am

Valuethinker wrote:
Random Musings wrote:Since the thought is that the techology value is the key (not AUM) - I would think Schwab or whomever can do it far cheaper than $100 MM.

It isn't a complicated model.

RM


Generally with disruptive innovation ...

I think of "disruptive" as implying a short time. Oops! You're out of business. Or, you're fabulously successful.

Jack Bogle was innovative but not disruptive. It's taken decades. The trend is obvious and probably unstoppable. "You don't need a weatherman to know which way the wind blows."

Is there space or even a need for disruption in what Wealthfront is trying to do? (What are they trying to do?)

Put small or unsophisticated investors in auto-pilot value-added investment choices at the lowest possible cost? Maybe, but where's the disruption in that?

The overarching trend is the velocity and availability of information. Abetted by social, mobile and the cloud. I fail to see the relevance of that to individual investors or, in particular, for my retirement plan and IRAs.

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Re: Burton Malkiel, Wealthfront CIO

Postby Rick Ferri » Fri Mar 29, 2013 6:31 am

I struggle with this also. Wealthfront's technology isn't disruptive because it isn't new.

Here is Vanguard's version of Wealthfront.

The process is exactly the same:

1) Answer a few questions on-line.
2) Get a mutual fund portfolio recommendation.
3) Invest now - this is how.

What makes Wealthfront different? They have a few more asset classes and rebalance automatically, but then so do Vanguard Life Strategy funds.

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Re: Burton Malkiel, Wealthfront CIO

Postby grok87 » Fri Mar 29, 2013 9:51 am

Rick Ferri wrote:I struggle with this also. Wealthfront's technology isn't disruptive because it isn't new.

Here is Vanguard's version of Wealthfront.

The process is exactly the same:

1) Answer a few questions on-line.
2) Get a mutual fund portfolio recommendation.
3) Invest now - this is how.

What makes Wealthfront different? They have a few more asset classes and rebalance automatically, but then so do Vanguard Life Strategy funds.

Rick Ferri

So I guess one question, then, is: how did they convince the VC's to give them $20 M? Perhaps it is an asset gathering strategy after all. i.e. the VC's think it could take off, become the next facebook/twiiter and gather $40 BN in assets. Hey its possible...
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Re: Burton Malkiel, Wealthfront CIO

Postby Valuethinker » Fri Mar 29, 2013 10:48 am

umfundi wrote:
Valuethinker wrote:
Random Musings wrote:Since the thought is that the techology value is the key (not AUM) - I would think Schwab or whomever can do it far cheaper than $100 MM.

It isn't a complicated model.

RM


Generally with disruptive innovation ...

I think of "disruptive" as implying a short time. Oops! You're out of business. Or, you're fabulously successful.


http://en.wikipedia.org/wiki/Disruptive_innovation

Although many of the examples of disruptive innovation are from tech, many are not. In tech the time cycles are usually, but not necessarily short. If you remember the Go Computer and Jerry Kaplan's book about it ('Start Up') what became in essence the ipad, someone sank several hundred million of venture capital into that in the early to mid 90s, and failed. Later came the Palm Pilot, which was successful for a time, but is now dead.

So even in tech, the theory of Disruptive Innovation, as outlined by Clay Christensen (see above) is not necessarily over a short time period.

Nucor and its approach to steel making disrupted the US industry over literally decades.

In a way the speed of the tech industry is anomalous (although Boston Scientific did something similar in heart stents-- I vaguely recall they went from 0 to 40% market share in about 4 years?). In most industries, it takes a lot longer. And lots of false starts and failures from new entrants.

Jack Bogle was innovative but not disruptive. It's taken decades. The trend is obvious and probably unstoppable. "You don't need a weatherman to know which way the wind blows."


It's really about language, but when someone says Disruptive Innovation (and I should probably have capitalized it) then they probably mean what Christensen is talking about.

Is there space or even a need for disruption in what Wealthfront is trying to do? (What are they trying to do?)

Put small or unsophisticated investors in auto-pilot value-added investment choices at the lowest possible cost? Maybe, but where's the disruption in that?

The overarching trend is the velocity and availability of information. Abetted by social, mobile and the cloud. I fail to see the relevance of that to individual investors or, in particular, for my retirement plan and IRAs.

Keith


The internet was big, but it has whittled us down to 1 search engine (at least in Anglo Saxon countries), 1 Ebay, 1 Amazon etc. So the firm moving at the right time can extract most of the market value that is there.

I agree I don't see obvious barriers to competition around Wealthfront-- you succeed by creating a business and then building barriers around it. Amazon has its logistics prowess and its high customer trust. Ebay has number of bidders and liquidity. Google has the best data, etc.
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Re: Burton Malkiel, Wealthfront CIO

Postby FinancialDave » Fri Mar 29, 2013 7:14 pm

Editron wrote:First-time poster here. I'm impressed by your knowledge and general skepticism, especially the longer post by Rick Ferri. I thought I'd add my two cents on Wealthfront.

I recently discovered Wealthfront while trying to figure out where to invest a rollover 401k and some other savings. I'm with E-Trade, and I'm paying .87 percent for a managed account. What attracted me to Wealthfront was the similar investment approach -- rebalanced index ETFs, plus "tax-loss harvesting" -- for a total of .40 percent. I took the quiz, created an account and just need to transfer the money. Now I'm having second thoughts, thanks to your posts about the business model. I also think I can do this myself for much less with Vanguard funds through E-Trade or directly through Vanguard.

By the way, I read the user agreement, and Wealthfront reserves the right to use your supplied image and name in any and all promotional materials.

-- Editron


You are right you can do it yourself in a couple different ways. Either just put $10k in the account for free and mimic the account elsewhere - if you like the allocation, or don't put any money there, just take the free quiz and buy the stocks at your Vanguard account.

When I did it, I got the following allocation in which 4 of the 6 funds were Vanguard:

VTI - 35%
VEA - 24%
VWO - 18%
VIG - 9%
DJP - 5%
MUB - 9%

This does sound very much like Malkiel, who typically likes a 50/50 split between US and International equities.

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Re: Burton Malkiel, Wealthfront CIO

Postby boggler » Mon Jun 03, 2013 2:00 pm

My biggest concern with investing in Wealthfront would be that in a taxable account, you get tied up in their investments. If they ever get acquired or change their strategy again (which is likely to happen), you'll probably be stuck with a lot of embedded capital gains in a set of ETFs you might not have otherwise picked or want to manage.

For an IRA, this would not be an issue.
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Re: Burton Malkiel, Wealthfront CIO

Postby FinancialDave » Tue Jun 04, 2013 12:36 am

boggler wrote:My biggest concern with investing in Wealthfront would be that in a taxable account, you get tied up in their investments. If they ever get acquired or change their strategy again (which is likely to happen), you'll probably be stuck with a lot of embedded capital gains in a set of ETFs you might not have otherwise picked or want to manage.

For an IRA, this would not be an issue.


I agree. They really don't have a long enough track record for a serious consideration.

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Re: Burton Malkiel, Wealthfront CIO

Postby abrahampayton » Thu Jan 02, 2014 10:15 am

Rick Ferri wrote:Venture capitalists (VCs) have committed over $27 million to Wealthfront by my count. That might seem absurd given the fact that they have very little in assets ($170 million) and charge a 0.25% fee. A RIA of similar size and fee might be worth $1.3 million (3x annual fees).

I thought the VCs were nuts at first, then after thinking about this for a long time, and after visiting Wealthfront and meeting several people including Andy Rachleff, this might turn out to be good venture capital investment. Why? Because this a technology company first and an investment management firm last.

My predictions is that Wealthfront will sell to Charles Schwab or another large investment company for between $80 and $120 million in cash over the next 2-3 years. This won't be because they're a huge success at gathering assets. Rather, it will be because Schwab or another firm will see the value in the technology and be able to apply it across their entire platform. It's a wealth multiplier for Schwab or whomever.

Here's how I see Wealthfront (formally KaChing) and where I predict they're going:

1) I see Wealthfront as a technology company. They write software that's intended to change an industry - in this case, personal investing.
2) They're showcasing their software through an investment company (formally KaChing and now Wealthfront).
3) The company first tried to attract clients as KaChing by picking active managers begining in the fall of 2009.
4) Although "KaChing" reportedly attracted $100 million in assets in the first year, it's not enough to continue the model.
4) In October 2010, Rachleff does a 180 by adopting passive investing using exchange-traded funds (ETFs) and changing the name of the company to Wealthfront.
5) New business acquisition is slow They wait for Linkedin and Facebook IPO and capture some of that money, although not nearly the level anticipated. What's missing is credibility. Rachleff wisely brings on Burton Makiel as CIO and puts his touch on the portfolios and his face on the advertisements. Assets increase due to some good press. They also hire heavy-hitting former Linkedin marketing talent. This leads to round-two of $20 million in VC funding.
6) The company announces this $20 million is to be used to market the firm and improve technology (getting on with big custodians like Schwab would be a big improvement also, IMO.)

I believe spending $XX million in marketing will buy the company at least $1 billion in assets and perhaps $2 billion, but it won't buy $40 billion. That's the number Rachleff said he Wealthfront needs make this a VC success in it's own right (see my earlier post).

Here is the catch - Wealthfront doesn't need $40 billion to make the VCs happy, they may not even need $2 billion.

I say again, this is a technology company first and an investment management firm last. Wealthfront RIA is a showcase for software. It's the techology that makes the company worth worth $80-$120 million to Scchwab or another large boker-dealer. They can use the software as a force multiplier in different ways to attract many billion in assets and grow their own AUM.

That's the story behind Wealthfront, or at least the way I see it on this 27th day of March, 2013.

Rick Ferri


Thanks for your posting on this Mr. Ferri!

My new spouse and I were looking at this company for their tax-loss harvesting services for our joint taxable account. But if they're probably just looking to be bought up by one of the Big Guys (Schwab, Fidelity, etc.), I think we'll keep our taxable at either Vanguard.

Thanks for the insight!
~Abraham
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Re: Burton Malkiel, Wealthfront CIO

Postby terrabiped » Thu Jan 02, 2014 10:39 pm

Rick Ferri wrote:I struggle with this also. Wealthfront's technology isn't disruptive because it isn't new.

Here is Vanguard's version of Wealthfront.

The process is exactly the same:

1) Answer a few questions on-line.
2) Get a mutual fund portfolio recommendation.
3) Invest now - this is how.

What makes Wealthfront different? They have a few more asset classes and rebalance automatically, but then so do Vanguard Life Strategy funds.

Rick Ferri


It's "the financial advisor for the new generation!" (I'm quoting the last line of the video on their homepage.) Everything about the branding on their homepage is telling me that this is where young, cool, savvy investors go to invest. Vanguard is probably their parents broker.

I'll stick with Vanguard.

Very interesting thread. I liked your analysis Rick.
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Re: Burton Malkiel, Wealthfront CIO

Postby nisiprius » Fri Jan 03, 2014 10:44 pm

terrabiped wrote:It's "the financial advisor for the new generation!"
Those who think old will remember:

"The lively crowd
Today agrees
Those who think young
Say "Pepsi, please!"
They pick the right one
The modern light one
Now it's Pepsi--
For those who think young!"

http://www.youtube.com/watch?v=F4vUwl7YGes

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Re: Burton Malkiel, Wealthfront CIO

Postby abuss368 » Sat Jan 04, 2014 5:00 pm

This story has been a little interesting to say the least. Mr. Malkiel was recommending REITs in all accounts including taxable accounts. He noted the diversification benefits and income stream in his many books. He signs on with Wealthfront and poof that all changes!

The model on their website does however recommend TIPS in all accounts - taxable and tax advantaged.

Hmmmmmm. Strange.
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Re: Burton Malkiel, Wealthfront CIO

Postby mac808 » Sat Jan 04, 2014 10:29 pm

I looked at starting a similar business in 2011. The problem, as mentioned earlier in this thread, is that the AUM # needs to be so massive @ 25 basis points fee in order to drive real revenue. I concluded it would be better off as a lifestyle business, which seems to be the route that other contributors to the forum have taken. I couldn't see many scenarios that would justify a huge venture capital round.

Maybe their plan is to aggregate lots of AUM and then sell out to Fidelity or Vanguard (or someone else), who can put their own Index funds in as default? Given the investors behind them, there is definitely at least a half-way credible plan on a powerpoint slide somewhere.
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Re: Burton Malkiel, Wealthfront CIO

Postby KyleAAA » Tue Mar 25, 2014 1:42 pm

Rick is right. The value is in the technology platform. No way could Schwab or the vast majority of the other large brokerages build this platform for less than $100 million all-in. And even if they could, it wouldn't be worth 3 years of opportunity cost building it themselves all the while being exposed to the risk that one of their competitors would just buy the platform and leapfrog them into the market.

Although from Wealthfront's perspective, I think just licensing their platform for a substantial fee would be an excellent business model. How many brokerages would pay 7 figures per year for a white-label platform like this to peddle their own custom portfolios (using in-house funds) on? I'd wager all of them. It's Web 2.0 financial advisor in a box.
Last edited by KyleAAA on Tue Mar 25, 2014 2:41 pm, edited 1 time in total.
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Re: Burton Malkiel, Wealthfront CIO

Postby niceguy7376 » Tue Mar 25, 2014 1:57 pm

umfundi wrote:
Rick Ferri wrote:Keith

Technology value is the only way I can come close to the $100+ million exit value the VCs are expecting from this company.

Rick Ferri

I've put a note on my calendar to look at Wealthfront in a year. It will be interesting to see how this plays out.

Keith


We hope that we will get the one year feedback by the weekend from umfundi.
[url]http://www.bogleheads.org/forum/viewtopic.php?t=6212[/url]
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Re: Burton Malkiel, Wealthfront CIO

Postby nostalgic » Tue Mar 25, 2014 5:00 pm

niceguy7376 wrote:
umfundi wrote:
Rick Ferri wrote:Keith

Technology value is the only way I can come close to the $100+ million exit value the VCs are expecting from this company.

Rick Ferri

I've put a note on my calendar to look at Wealthfront in a year. It will be interesting to see how this plays out.

Keith


We hope that we will get the one year feedback by the weekend from umfundi.


umfundi is no longer active, per his own decision. Can't remember all of the details but basically irreconcilable differences with BH board mgmt.

He always had interesting opinions.
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Re: Burton Malkiel, Wealthfront CIO

Postby gabbar » Thu Apr 03, 2014 7:36 pm

Another round of funding for Wealthfront.

http://venturebeat.com/2014/04/02/even- ... aises-35m/

I looked it up on bogleheads after someone recommended it on my facebook feed.

BTW, while the TLH process with similar objective ETFs is obvious, I don't understand how they do tax loss harvesting in their 500 stock portfolio.
What are they doing? Selling Amazon and buying eBay = replacement with a similar company?
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Re: Burton Malkiel, Wealthfront CIO

Postby freddie » Thu Apr 03, 2014 8:46 pm

Google Aperio Group and Parametric Portfolio Associates to read about their tax managed portfolios but yeah they drift a bit from the indexes in order to maximize tax advantages. But you don't have to sell all of your stock. Imagine you want to hold 100 shares of amazon and 100 shares of ebay. Both have tax losses and they have some type of correlation. You sell 10 amazon shares and buy 10 ebay ones and 30 days later to the reverse. You will have some drift from the index but the odds are when you do it 100x year that those drifts even out pretty well.


gabbar wrote:Another round of funding for Wealthfront.


BTW, while the TLH process with similar objective ETFs is obvious, I don't understand how they do tax loss harvesting in their 500 stock portfolio.
What are they doing? Selling Amazon and buying eBay = replacement with a similar company?
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Re: Burton Malkiel, Wealthfront CIO

Postby nisiprius » Thu Apr 03, 2014 9:05 pm

Still can't figure out how they come up with such a tongue-twister of a name. Even if you only count the "th" as one, that's four consonants in a row. Try saying "wealthfront" ten times fast. I'm sure the people who work there are mangling the name by the end of the day.

Whoa whoa whoa whoa--how did we all miss this detail, or is it back there in the thread and I overlooked it?

"Andy Rachleff is out as CEO of Wealthfront
Andy Rachleff is out as CEO of Wealthfront as former LinkedIn star takes his place. Adam Nash has succeeded Andy Rachleff as chief executive and president of Internet-based advisory platform Wealthfront.... Nash has proven ability to engineer what Silicon Valley’s elite call “product market fit,” a fancy term for building the magic into a site....

“Execution doesn’t matter,” says Rachleff, exaggerating to make a point in an interview. “It only matters if dogs want to eat your dog food....” ...That makes Nash... the dog whisperer.

...Getting start-ups out of the Earth’s atmosphere is Rachleff’s strength. Getting them all the way to Mars is not his department.... [Rachleff wrote] "...I knew I wasn’t the most appropriate person to scale the business..."
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Re: Burton Malkiel, Wealthfront CIO

Postby Rick Ferri » Sun Apr 06, 2014 10:37 pm

Wealthfront previously raised $20 million in March 2013, and its total funding is now up to $65.5 million.


That's just incredible. As the founder of one of the first and largest low-fee investment adviser firms in the country who is managing $500 million more than Wealthfront, I find their valuation staggering. It's not the assets under management that are being valued here, I guarantee that!

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Re: Burton Malkiel, Wealthfront CIO

Postby Biffer » Mon Apr 07, 2014 6:25 pm

nisiprius wrote:
"Andy Rachleff is out as CEO of Wealthfront
Andy Rachleff is out as CEO of Wealthfront as former LinkedIn star takes his place. Adam Nash has succeeded Andy Rachleff as chief executive and president of Internet-based advisory platform Wealthfront.... Nash has proven ability to engineer what Silicon Valley’s elite call “product market fit,” a fancy term for building the magic into a site....

“Execution doesn’t matter,” says Rachleff, exaggerating to make a point in an interview. “It only matters if dogs want to eat your dog food....” ...That makes Nash... the dog whisperer....."

Does this mean we may see the “Now Managing $800,000,000+” banner replaced with a more traditional metric:

Over 99 Billion Served [cans of Alpo] ?
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