The automated wealth management firms (known as “robo-advisors”) that are bringing algorithmically enhanced services to the stodgy world of retirement planning are gearing up to go Terminator as competition intensifies.
In what’s sure to be the first shot in a salvo of big new rounds for these (no-longer) startups, Palo Alto, Calif.-based Wealthfront has raised roughly $70 million in a new round of financing, according to people familiar with the company’s plans. The new financing comes just six months after the company closed a $35 million round in April. There was no word on whether the new financing morphs Wealthfront into the mythical, billion-dollar “unicorn” status, but it should put the company in the “uni” range at least.
The timing of the round is auspicious. The boomer behemoth of wealth management and financial services, Charles Schwab & Co., just announced that it was going to offer its own version of the robo-advisor called Intelligent Portfolios. While some of the early startup entrants into the market are skeptical of the quality of Schwab’s product (namely the algorithms), it’s a big move that both validates the market for a broader consumer audience and announces that Schwab isn’t going to go gently into its good night of irrelevance or cede its pole position as one of the top consumer wealth management firms.
Venture investors can sense that the wealth management industry has been slow to adopt new technologies and have been throwing money at the sector accordingly. Investments in personal finance and wealth management companies have already raised over half a billion dollars this year and the pace of investment seems to be holding steady, according to CrunchBase.
With the new financing, the pressure is on other companies in the space like Betterment, SigFig and PersonalCapital to raise significant rounds of their own. Most of these startups have also raised significant investment rounds this year, but as with the lending space earlier, the large rounds will probably continue to come.
Since 2011, Wealthfront has had phenomenal growth, reaching $1 billion in assets under management in less than two-and-a-half years. In a blog post when Wealthfront surpassed the billion-dollar threshold, chief executive Adam Nash attributed the company’s success to the millennial investor. Nash writes:
There are over 90 million Millennials in the US with an aggregate net worth of more than $2 trillion; by 2018 that is expected to grow to $7 trillion. This generation has a very different set of expectations about what they want from an investment service.
Millennials grew up with software and expect services to be delivered online. They don’t have the patience to have to talk to someone to complete their transactions. They lived through two market crashes and are highly cynical about the claim that you (or anyone) can outperform the market. They have been nickel-and-dimed through a wide variety of services, and they value simple, transparent, low-cost services.
Nash then related a story that Charles Schwab, the eponymous founder of Charles Schwab & Co., told Wealthfront co-founder Andy Rachleff about the parallels between the two businesses. Schwab started with a client base in their 20s and 30s and that the brokerage grew as investors’ aged. Today, “Schwab has grown with the baby boomer generation to $2.3 trillion in client assets,” Nash writes. It took Schwab six years to reach $1 billion in assets. Nash wrote that he thinks Wealthfront is riding a bullet train instead of the baby boomers’ “Peace Train”.
A Wealthfront spokesperson declined to comment.
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