Wealthfront bets on ‘self-driving money,’ following Netflix’s playbook

on Mar31
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Wealthfront’s strategy is to automate an investment process that was once largely done by humans, from account set up to fund selection and account maintenance. All of this hinges on its customers trusting computers, hence, the firm’s target audience are tech-savvy millennial investors.

So far, Wealthfront has signed up 270,000 accounts, with roughly $13 billion in assets under management. It is what the founders call “self-driving money.” Similar to how humans use an autonomous car, people using the Wealthfront app are investing automatically in accounts that are doing the work for them, but they can take control when they want.

Roughly 90 percent of these customers are under the age of 45. Young people are largely ignored by traditional brokers, who usually want hefty account balances, and they are “desperate for something,” Rachleff said.

Like Charles Schwab and an earlier generation of discount brokers, Wealthfront and its fellow robo advisors are changing how the brokerage industry works. But it’s taken about a decade to get here.

Rachleff spent many years as a Silicon Valley investor before deciding to retire in 2005 and teach at his alma mater, Stanford’s Graduate School of Business. There he has become something of a pied piper for newer generations of tech entrepreneurs.

Andy Dunn, the CEO of Bonobos, took Rachleff’s class when it was co-taught with Google CEO Eric Schmidt. The class was highly recommended but tough to get into, he told CNBC. It was one of those classes where “people walk in and everyone’s quiet and prepared,” he said. “People were hanging on his every word.”

Rachleff also became a trustee at the University of Pennsylvania, where he went to college and now chairs the endowment board. His experience with the endowment kindled the idea for what would become Wealthfront. Extremely wealthy people and big investors like endowments pay money managers big fees to generate returns using sophisticated models. Those managers demand high minimum investments, far beyond the reach of ordinary people.

Rachleff’s idea was to use software that would take those same sophisticated money management techniques and make them affordable and accessible to more people.

Dan Carroll had come to a similar conclusion. In 2009, Carroll took to Facebook to create an app where people could create virtual portfolios and learn how to invest without using any actual money. The app quickly amassed half a million users. Eventually he teamed up with Rachleff to start “KaChing” — a market place of vetted portfolio managers — which failed. They shifted gears to start Wealthfront in 2011.

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