SaaS Interviews with CEOs, Startups, Founders
EP 498: $130M Raised Wealthfront Crosses 100,000 Investors, $4.4B in AUM with CEO Andy Rachleff
04 Dec 2016
Chapter 1: Who is Andy Rachleff and what is his background?
This is The Top, where I interview entrepreneurs who are number one or number two in their industry in terms of revenue or customer base. You'll learn how much revenue they're making, what their marketing funnel looks like, and how many customers they have. I'm now at $20,000 per top. Five and six million. He is hell-bent on global domination. We just broke our 100,000-unit soul mark.
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Chapter 2: What motivated Andy to transition from venture capital to Wealthfront?
Nathan Latke here. This is episode 498. And coming up tomorrow morning, you guys are going to learn from Sunil Patra. And Sunil is the CEO of GetSignEasy.com. They have over 130,000 customers doing over 200,000 bucks a month in recurring revenue to help people sign documents easier. Don't want to miss it. Top job. Good morning.
I'm smiling big today because I think you're going to enjoy our guest. His name is Andy Ratcliffe. And if you don't know him, he is the CEO or one of the co-founders actually of Wealthfront is currently president and chief executive officer.
He served as a member of the Board of Trustees and vice chairman of the Endowment Investment Committee for the University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship.
Now, prior to Wealthfront, Andy co-founded and was general partner at Benchmark Capital, where he was responsible for investing in a number of successful companies, including Equinix, Jupiter Networks, and Opsware. He's also spent 10 years as a general partner with Merrill Pickard Anderson and EYRE. I believe they're public at StockTicker MPAE.
Chapter 3: How does Wealthfront generate its investment strategies?
Andy earned his BS from University of Pennsylvania and his MBA from Stanford Graduate School of Business. Andy, are you ready to take us to the top? I am, thanks. Did I get that right? Is that just an abbreviation or are they public?
No, it was a venture capital firm. That was just an abbreviation.
Got it. Okay, good. So venture capital firm. So, hey, first question I got to ask you, it's rare that you see kind of CEOs or sorry, investors, especially someone with your kind of background, jump from the VC side to the entrepreneurship side. Typically, you see like a Phil Lippin route. They go from Evernote to inside a firm. Why did you make the decision to jump into your investment?
Probably because I'm not very bright.
Chapter 4: What makes Wealthfront's tax minimization strategy unique?
Actually, I had retired from the venture capital business to give back. That's why I went on the faculty of my grad school alma mater. I became a trustee of my undergrad school alma mater. And as you read, I'm soon to be the chairman of Penn's endowment committee. Penn is, I think, the seventh largest endowment in the country.
And one day I was sitting in an endowment meeting and the management team was talking about how they generate the great returns that they did. And I thought I could actually do a social good by using software to deliver what the premier university endowments did for the masses, thereby democratizing access to sophisticated investing. So the idea found me. I was not looking to start a company.
You know, I wish I was smart enough to have made that connection before the show because I would have changed some of the things I wanted to ask you about. But one of the people that I respect the most, and you probably know him, is Swenson at Yale. And his portfolio theory for what he's done with that endowment is fascinating. What I heard you just say is you kind of love this model.
You love to bring it to the masses. And that's why Wealthfront is so interesting.
Chapter 5: How does Wealthfront compare to traditional investment firms like Vanguard?
Well, it's interesting. I've known Dave for a long, long time. He's been an investor in my two venture capital firms.
and when he heard about wealthfront he said you know i think this is the best way to manage assets other than perhaps the top 10 endowments in the world and i took that as an amazing compliment do you guys follow any of his kind of portfolio theory you know 30 you know i mean he broke breaks it down in his book unconventional success but does wealthfront the code actually reflect some of that strategy
Well, the way that we allocate assets or the way that we generate our investment mix is based on the same techniques that he uses. He has access to alternative assets, which we do not because you need to be an accredited investor to access that. But the same methodology that he uses to build a diversified portfolio we use.
Makes perfect sense. Andy, can you walk us through, for those not familiar with Wealthfront, I think most will be, but what do you do? Just give us the high level and how do you generate revenue?
Sure. We manage a diversified portfolio of low-cost index funds on behalf of our clients. We do this at extremely low minimums. The minimum is only $500 to open an account. Extremely low fees.
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Chapter 6: What are the current assets under management for Wealthfront?
We charge less than a quarter of a percent annually as an advisory fee. And we do it in an incredibly tax-efficient manner. And we do it in a set it and forget it style. It's all managed electronically.
For somebody listening right now going, Nathan, I've studied kind of this space. And what I've done is I just take a percentage of my pay every month and it goes directly into a Vanguard account with a very low expense ratio. That's a S&P 500 kind of index wealth front over that kind of model.
Well, if you like Vanguard, you're going to love Wealthfront. And the reason is that we're able to do things in software with regard to minimizing your taxes that Vanguard cannot. And the benefit of that tax minimization is worth at least six to eight times what we charge in fees. So I know that people are sensitive to fees. They should be.
You know, you can't control the market, which is why you should invest in index funds like Vanguard's. We use Vanguard index funds in our service because we can invest. But the way that our chief investment officer, Bert Malkiel, who basically invented the index fund, likes to say you can't control the market.
Chapter 7: How does Wealthfront's growth strategy involve client satisfaction?
So focus on the three things you can control, diversification, minimizing fees and minimizing taxes. Unfortunately, Vanguard can't minimize taxes, and we can do that through things like tax loss harvesting and direct indexing, which, as I said, can add anywhere between 1.5% and 2% to your annual after-tax return.
We think that's a pretty good tradeoff for a fee of less than a quarter of a percent.
mean let's let's i'm going to be talking way over my head here but i'm going to try and stick with you uh many people are thinking okay if clinton gets elected potentially some of these taxes are going to go up so one of the things people are saying now is you know from a taxless harvesting perspective on equities or securities maybe what you do is you let go of your losers now take the loss now that's one of the things that am i getting it right that wealth front can kind of do automatically
Yeah, and we do it daily. So this is a service, a kind of service that's been offered to the very wealthy for many years, for decades. As a matter of fact, Mitt Romney took advantage of this to pay really low taxes. This was a big issue in the last presidential election.
But it's never been possible for the average retail investor to access this kind of capability because traditional advisors can only do it at year end. It just takes too much time. The beauty of software, software works 24-7. So we can look for these losses daily. And if you do tax loss harvesting just at year end, according to our research, that can add about
0.6% to your annual after-tax return. But by looking for these losses daily, it can add, as I said, 1.5% to 2%.
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Chapter 8: What insights does Andy share about sustainable business growth?
It's really quite amazing.
So walk us through some of the numbers because the story is incredible. And correct me if I ask a question around a number that is not one of your KPIs because I could be totally off base. I imagine you probably manage assets under management. What are you guys at now?
About 4.4 billion.
Okay, and where does that kind of place you in terms of other, I kind of guess, vehicles where people are putting their money?
Well, to give you some context, I think that Vanguard manages $4 trillion and Charles Schwab manages something like $2.5 trillion. So that's a tiny drop in the bucket relative to these behemoths. And I think that retail investors have more than $20 trillion under management. As a venture capitalist, what I used to focus on was rate of change, not absolute numbers.
What you find is that with every new technology that succeeds, it gets adopted at a faster rate. So think about the rate at which the telephone was adopted and then radio and television and cellular telephony and the internet. Each new major technology that gets adopted tends to get adopted at a faster rate and grows into a bigger market.
And if you drill down on just an individual market, you find the same thing. So, for example, ETFs were adopted at a faster rate than index funds, and they just now crossed over index funds in terms of having more assets under management. Automated investment services have grown and have been adopted at a faster rate than ETFs.
So that gives me faith that ultimately automated investment services are actually going to manage more assets than even ETFs.
And what an interesting theory. Talk to me more about the volume of individual investors you have using you. Is that a number you can share or arrange?
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