Andy Rachleff founded Wealthfront a decade ago to give investors a better and smarter way to manage their wealth, building on core academic research showing that a carefully balanced portfolio of low-fee ETFs outperformed more aggressive strategies. Since then, the company has taken in billions of dollars of invested capital under management and expanded into new banking services, including high-interest checking accounts.
Rachleff and I talked on Extra Crunch Live about where Wealthfront is heading as it speeds toward its second decade, how he sees the competition from other, more active trading platforms like Robinhood and his advice for startup founders looking to build enduring products and companies away from the daily status quo.
Self-driving money*
Rachleff began our conversation talking about the future of Wealthfront, which is increasingly moving beyond its wealth management app to new services.
“Our vision is to automate all of your finances — we call this self-driving money,” he said. That platform is expected to role out in September, and include features like easy direct deposit and automated bill pay, with any savings left over automatically moving to the right investment assets that meet a user’s chosen risk tolerance.
One of the most interesting philosophies about Wealthfront is that Rachleff and his product and engineering teams are obsessive about automating just about everything to make the app experience the fastest and best it can be — while also reducing expenses. “If we can’t automate a service, we don’t offer it,” he explained. “The benefit of automating a service is that we can deliver it at much lower cost than anyone else.”
That led into a broader theme about what “fintech” even means today:
The funny thing about fintech is most fintech companies are big ‘fin’ little ‘tech.’ They’re just a thin layer of software on somebody else’s infrastructure. At Wealthfront, over half of our employees are engineers. That’s really unusual in fintech. We view ourselves as little ‘fin’ big ‘tech.’ We’re a software company that does banking and investing, and so what we try to do is deliver services at very low cost and then share the economics with our clients so we can make money with them, not from them.
Despite focusing on a broadly “millennial” audience, Wealthfront doesn’t advertise much at all, said Rachleff. In a market segment where the cost of acquiring a customer can exceed $500, “we’re not going to advertise unless we can acquire someone for $50,” he said. The goal is that by keeping marketing expenses low, those savings can be passed along to Wealthfront’s users. He noted that word-of-mouth is the primary channel for growth.
Day trading versus the slow and steady passive investor
One topic I was very curious about is how Wealthfront was navigating investing’s competitive landscape. Robinhood has made day trading and active management much more popular for younger investors, while dozens of new “robo-advisors” have materialized in recent years.
For his part, Rachleff said he essentially never looks at the competition, arguing that product innovation can only come from your own work and not by trying to copy your competitors.
Has Wealthfront changed? Rachleff argues no, and in fact, denies the label “robo-advisor” entirely:
It hasn’t changed at all because the academic research hasn’t changed. We are only interested in what peer-reviewed research says is the best approach. Earlier, you talked about how we use machine learning and algorithms. That’s actually not true. There’s no machine learning. And there’s no algorithms. All we do is basically implement what the best financial advisors have been doing for decades, but by doing it in software, we lower the cost. So there’s no fancy algorithms, we’re not trying to pick which markets are undervalued or overvalued.
Rachleff noted that endowments like the University of Pennsylvania, where he serves on the investment board, have been using modern portfolio theory for years, and he wants to bring that proven theory to more users.
When it comes to day trading and the hyperactive investing that emanates from Robinhood and other stock trading apps, Rachleff didn’t feel their users intersect with Wealthfront’s core customers at all:
There’s a lot of research that shows that the average individual buys when the market goes up and sells when the market goes down. I think that’s what’s led to this day-trading frenzy that’s going on right now. Now, over the long term, this has cost the average individual investors anywhere from 1.5%-3.5% depending on the research report that you read. So it’s a really bad idea to day trade. But it’s fun, it’s great entertainment, but it’s a really bad idea to day trade. So we really don’t do anything like that.
Rachleff said ultimately, if users are going to day trade (and by implication, ignore the research literature showing the long-term damage of that strategy), there isn’t much he or his team can do about it. “All we can do is inform,” he explained. “One of the challenges of a startup is you can’t educate, you have to rely on other people to educate. Now we can only preach to the converted.”
That often means reaching out to the older side of younger investors who have deeper investment experience. “At least on the investment side, we don’t try to go after very young people, because they haven’t yet learned the lesson that they shouldn’t invest themselves,” adding as a punchline, “This day-trading thing is incredible news for us — in one year” (i.e. when everyone has lost their socks on Tesla gyrations and wants to actually accrue wealth in a risk-adjusted way).
Transitioning from venture capital to startup founder
Before he founded Wealthfront, Rachleff spent eight years at leading early-stage firm Benchmark as a general partner. I was curious about how he transitioned into Wealthfront and how he has continued to adapt to entrepreneurship:
It’s funny, venture capital doesn’t train you at all to be an entrepreneur, nor does being an entrepreneur train you to be a venture capitalist. I think that they have very, very little in common. The only thing that I really brought with me from venture capital was a philosophy of, it’s not the frequency with which you’re correct. It’s the magnitude when you are.
For Rachleff, that pushed him to instill a culture of risk-taking in the company. “We have a product philosophy memo that’s a living document that constantly gets updated. But in it, I explained to all of our employees that I expect us to be wrong most of the time,” he said. The key is that by trying new features and going all in on them, Wealthfront can take full advantage of the upside when the company is right.
One other major transition from the venture capital world into entrepreneurship is that Rachleff increasingly believes that companies should be hiring and promoting from within, rather than just finding senior talent through recruiting:
I’ve changed my outlook completely from the time I was a venture capitalist, and this is one of the things that was the biggest surprise to me.
So when I was a venture capitalist, I used to spend over half of my time recruiting and looking for what I used to call ‘world-class executives.’ And we’d hire executive recruiters and we’d really try to find people who are outstanding.
Now, I prefer up-and-comers to people who are doing it over again, because if you’re willing to do it over and over again, then you really weren’t on that big of a growth trajectory. We recruited a number of them to Wealthfront and now … 70% of our management team are people who were promoted from within.
Some final product thoughts
Rachleff, who in addition to being the CEO of Wealthfront has also taught at Stanford’s Graduate School of Business for many years, left with some thoughts on product-market fit that ties back to the points he made about which consumers Wealthfront targets.
“Should everyone like your idea? Absolutely not. Because if everyone likes your idea, they only like it because they’ve been conditioned to like it, which means there’s already someone supplying the product. And what we’ve learned in technology is better doesn’t matter. If there’s a good enough solution, you’re dead,” he explained.
I’m “from the Ricky Bobby School of Management. If you’re not first, you’re last. You can’t become first by outperforming your competitor. In technology that’s really, really hard to do to come from behind with a better implementation. So you have to define the market. And the only way you do that is by delighting your customer. So you have to be riveted on delighting the customer.”
Ultimately, Rachleff’s goal for Wealthfront is not just delighting the customer, but to keep delighting them … forever, potentially. Endurance is one of Wealthfront’s top values — and that’s what it takes to build a top-performing startup.
* “Self-Driving Money™” is a registered trademark of Wealthfront Software LLC.