Wealthfront: Investing for the Future

            After working for some time at a company which specializes in automating a touch-heavy component of the mutual fund business (intermediary compensation between brokers and their dealers), the things I had heard about the finance industry being behind the times suddenly became very real.  People from within the industry would confess to using infrastructure and technology from the 1970s yet had no plans to change it because their companies had enough money to continue being inefficient.  Having seen and heard other horror stories over my years of working in finance, it is incredibly clear that the majority of the industry is in major need of a makeover.  Yet it is slow in coming because incumbent leaders (financial advisory firms, investment banks, brokerages, etc) are monoliths that face neither competition nor the resource constraints that cause companies in other industries to innovate.  It is customers that are implicitly punished with high management fees, delays in transaction processing, and other inconveniences associated with failing to keep up with the zeitgeist.

            Luckily, in the 21^st century there has been a renewal of interest in the money management space which has led to all kinds of new tech startups like SigFig, Betterment, FutureAdvisor, PersonalCapital, Mint.com, Nutmeg in the UK, etc have been pouring immense energy and resources to pick up the slack with the ultimate goal of making it easier for non-finance people to enjoy transparency in knowing where their money is going and how it is performing better than it would be if it sat in a bank account or some other investment service.

            It is in this context that Wealthfront comes in.  The cause of making investing better for the people is a noble one and they have picked up a lot of publicity lately for doing just that (and also for closing a massive round of new funding).  Like many investment services, Wealthfront automates the complex process of finding a perfectly balanced portfolio.  Yet what makes them unique is the low management fees (and no commissions) which allow the service to be utilized by the general public. All of the sudden, esoteric investment strategies, daily rebalancing, tax-loss harvesting, and other features previously only available to a lucky few are at the fingertips of anyone who cares to sign up. 

            People have noticed.  Wealthfront’s massively disruptive business has garnered them over a billion dollars of assets under management in just two and a half years.  It will be interesting to see if traditional finance institutions take notice enough to alter their own businesses to keep up with the times.  It seems unlikely, but in the face of such new technology from Wealthfront and their peers, it might be hard to stay relevant for the generations of investors going forward.  I’ve always enjoyed helping friends get started with investing and offering specific guidance with which securities to pick.  Yet after reading about the automated investing industry, I think my direction for them will be much more succinct going forward. 

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Mark Cuban on a Great Pitch

            I recently read an article on TechCrunch about the four broad components of a good venture capital pitch according to Mark Cuban.  It is a good thought exercise for any startup, however, regardless of if or where it is in the process of fundraising because developed thoughts on each point are crucial parts of the nascent company's soul searching process.  These come in the form of answering four questions: what is your core competency? Why are you great? How will you scale? How is your idea protectable?  The first two relate to business and the latter two relate to product.

            The business questions are Sun Tzu repackaged for the 21^st century. “If you know the enemy and know yourself, you need not fear the result of a hundred battles…If you know neither the enemy nor yourself, you will succumb in every battle.”  It is of paramount importance that a company understand itself internally as well as externally as it is oriented in some market space.  The core competency question asks what you’re the best at and the question of “greatness” compares you to your competitors.  How are you better than other players in the space?

            The product questions relate to what comes out of your business.  Once the idea is executed, how difficult will it be to reach 10,000 people, 10 million people, a hundred million, and so on?  Is the product touch-heavy enough that employee-count will have to grow dramatically to accommodate an increased user base (such as insurance) or is it fairly self-service where most of the interaction is done independently by the customer (such as Pinterest)?  In this case, there is not a right or wrong answer since some products require more company involvement by nature than others.  Yet it is still important for a growing company to understand and convey the scaling situation to be adequately prepared ahead of time.  The question of being protectable is straightforward.  Barring instances where the first-mover advantage in highly capital intensive industries seals dominance (utilities, natural resource extraction, etc) there are always copycats out there that will try to capture market share when they identify good ideas.  Since protection is vital, patents are so important.  Beyond that, it is important for a company to be its own biggest competitor.  If a company does not innovate itself, someone else will innovate it to obsolescence.

            In my own experience with researching and writing investment memos, absent answers to any of these questions means it will be sent back for revision.  Yet once they are answered, everyone involved in the investment process will have a clearer idea of what the company in question is about and be able to make an informed decision from there. 

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