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Wealthfront Revs Up With AI, But Is Still Running on Fumes

Posted by on Apr 12, 2016 in Industry Analysis
Wealthfront Revs Up With AI, But Is Still Running on Fumes

Wealthfront finds itself facing a cloudy future as its fifth anniversary nears, thanks to the dust that its bigger rivals, Vanguard and Schwab, and its disruptive competitor, Betterment, are leaving in their wake.

The robo-advisor just announced a collection of new features that they hope will right the ship and get their asset growth back on track.  CEO Adam Nash referred to the new features as Wealthfront 3.0.  They include artificial intelligence to analyze user behavior, integrations with an unwieldy collection of financial apps and (finally) an updated dashboard to replace the boring and lifeless one they have had since version 2.0 came out back in December 2013.

Vanguard and Schwab have jumped ahead in the online race for assets, picking up $31.0 billion and $5.3 billion in client money, respectively, since the launch of their digital advice platforms. Overtaking these financial powerhouses may prove to be an impossible task for Wealthfront, given the larger firms’ established brand presence.

Unfortunately, a lot of the features that Nash is crowing about have been available for months or years on competitor’s websites.  Personal Capital has offered a well-designed dashboard since they launched in 2011.  Betterment has been monitoring their users’ activity on their site for quite some time to better gauge their market sentiment. (See Robo-Advisor Shakeout: Who Will Be The Last One Standing)

In my opinion, Betterment is pulling away from Wealthfront in assets and is poised to take on Schwab and possible even Vanguard.

Fourth place seems more doable for Wealthfront, but the gap between the firm and its rivals is about more than money. Wealthfront is losing ground to Betterment in terms of innovation as well.

Wealthfront needs to speed up the pace of innovation if they hope to make up lost ground and continue to be a viable company. Wealthfront 3.0 is a step in the right direction, but they’ll need to do much more to shrink the gap. (See 4 Reasons Why The End Is Near For Wealthfront.)

A Random WalkWealthfront

Included in the Wealthfront press release was plans for integration with an unusual collection of finance apps:

  • Venmo — Peer-to-peer payment sharing where friends send and receive money with each other.
  • Redfin – An online real estate database that provides real-time values to homeowners and renters.
  • LendingClub – A crowdsourced borrowing hub that connects consumers with lenders outside of the traditional banking network.
  • Coinbase – An online network for Bitcoin transactions.

If you can see the common thread contained in these decisions, you’re one up on me.  Because I think it seems like a random group without much benefit for an advisory firm, or their clients.

Why build links to these services?  Do they think clients will pay their babysitters with funds from their IRA?  Or perhaps they will buy a new Dell computer with Bitcoins purchased out of their kid’s 529 college fund?

Maybe Nash trying to pivot from investment advice into the personal financial management (PFM) space?  It’s difficult to understand a goal or identify the pattern here, but it would not surprise me if he was looking for other ways to generate revenue and attract new users.  Their plans to become the next disruptive force in financial services have fallen flat.  (See Wealthfront Is No Charles Schwab, Yet!)

They could be looking for access to external data and financial activities of their clients that could be used to develop insights into their behavior and better recommendations.  This would be similar to how Amazon recommends products based on previous purchases.

One shortcoming with these specific integrations is the limited scope of transactions they cover.

A peer-to-peer payment service like Venmo provides visibility mainly into small transactions such as when Millennials share a cab, buy drinks or go out to dinner in groups.  These are hardly useful transactions for investing, but could be valuable to identify spending patterns or nagging people to reduce their expenses and direct the savings into their Wealthfront accounts.

Home valuation data from Redfin could be added to a client’s net worth calculation. This could be valuable for advanced retirement planning if equity in the house could be calculated based on a projected selling price and added into the client’s assets.

The Coinbase deal sounds to me like pure marketing fluff.  “Look at how hip and cutting edge we are!  You can convert your retirement savings into Bitcoins, instantly!”

There are only 13 million Bitcoin users in the entire world holding a total of $6.2 billion in the digital currency.  These figures are rounding errors when compared against credit cards or any other traditional form of electronic payment.

Data Aggregation As a Driver of Risk Assessment

I’ve long recognized the potential that data aggregation can bring to digital financial advisors. Using aggregated data to observe behavior from clients’ other spending and financial accounts can provide more objective insights than what clients self-report through traditional risk assessment questionnaires.

They’re not the first firm to try to tap the potential of data aggregation and behavioral insights for their robo-platforms. I wrote previously about Envestnet’s acquisition of data aggregator Yodlee and the partnership between Riskalyze and Quovo. (See 5 Reasons Why the Envestnet Acquisition of Yodlee Was Brilliant)

As I stated in my article, Smart and Agile: Riskalyze and Quovo Help Advisors Stay Ahead of Robos:

“Data aggregation promises to open a door for advisors by giving them deeper knowledge of how clients manage all of their finances—from checking account transactions, to loan and insurance payments, to assets in other savings and investment vehicles.

For Riskalyze, partnering with Quovo makes sense because of the depth and quality of their data. Quovo offers Riskalyze a deep pool of investment account data from valuable industry sources—retail brokers, custodians, mutual fund families, and more.”

Wealthfront would get much more value out of an integration with a data aggregation provider like Quovo.  This would provide a richer trove of insights and data to use in building their financial profile.  Personal Capital has had the ability to automatically import held away assets almost since they first started, by leveraging their relationship with Intuit.  This is one of the reasons why they have almost one million registered users of their PFM app.

Hopefully, this in the works for a future Wealthfront release.

Client Sentiment on Cruise ControlWealthfront

What are Wealthfront’s competitors doing differently to gather and use data on client behavior? Riskalyze rolled out “Check-Ins” this past February as a tool to help advisors gauge how clients are feeling about market volatility. The email-based questionnaires are quick and simple, and designed to give advisors a heads-up when client attitudes or behaviors may be changing.

The check-ins are voluntary and largely reliant on clients self-reporting their current feelings about risk. The information collected through the email questionnaires are subject to clients’ unconscious biases.

Betterment is looking beyond self-reporting and data integration to gather insights on client behavior. Instead, they monitor client activity on their platform in search of more accurate information on client sentiment.

Clients who log in to check account balances more frequently are often more concerned about their wealth. Betterment hopes that watching for these kind of behavioral patterns will help them identify changes in client sentiment and give their advisors the opportunity to intervene if necessary.

Betterment’s platform already uses behavioral insights gleaned from AI capabilities in its SmartDeposit feature, which sweeps extra cash from client bank accounts into their Betterment investment account. Betterment also puts AI to work in helping their clients understand the tax impact of model changes before they make costly trades. Personal Capital’s digital platform also includes algorithms that look for idle cash in outside linked accounts that clients can put to work for their future.

Plus, both robo-firms are far ahead of Wealthfront in the experience of using the client interface. Wealthfront just added interactivity to their dashboard in the current release. It’s a necessary update to improve the client experience, but these features are table stakes at this point.

Wealthfront Is In A Race For Its Life

Wealthfront is not only in the race of its life with its fellow independent robo-advisors. The firm also faces competition from traditional advisors who now have the ability to launch digital platforms of their own with the services of robo-platforms like Invesco Jemstep, custodians like Schwab and wealth platform providers like Fiserv. (See 3 Thoughts on Why Invesco Acquiring Jemstep Was A Smart Move and The Changing Face of Robo-Advisors.)

The commitment to innovation is admirable, as is Wealthfront’s effort to stick to its guns and stake out its turf with a direct-to-client model. But they’re also late to the AI party. The changes they’ve introduced through version 3.0 are much needed, but they may be too little, too late.

It’s difficult to stay in the race when you’re stuck in the slow lane. If Wealthfront aims to compete with their robo-advisor peers in the future, they’ll need to shift their innovation engine to a higher gear.

1 Comment

  1. How the RoboAdvisor Renaissance Pushed the Industry Out of the Dark Ages - Wealth Management Today
    July 9, 2016

    […] Riskalyze has rolled out a tool called “Check-Ins” to help gauge client anxiety in times of high market volatility. Others use the frequency of client log-ins as a proxy for judging client sentiment. The trouble is that the accuracy of the self-reported data depend on the clients’ willingness to admit discomfort. […]