Wealthfront and marketing for asset management startups
Two shorts parts here (i) Reasons why I like WF (ii) Thoughts on marketing for asset management startups.
(i) Reasons why I like Wealthfront
Two reasons why I particularly like what Wealthfront (among others) is doing are:
1.Index investing: The ability to generate repeated returns on public markets with legit stock picking has not been proved for professional investors, quite the opposite, so ETF/index investing should be the way to go for the majority of us. There is probably a bunch of smart people that really know what they are doing, as well as a few ones trading on insider information (probably the only rock solid stock picking), but for sure they are not as many as financial advisors/private bankers/brokers who give us stock recommendations.
The value of advisors/bankers is very much in holding the hands of the client in bad times when he is tempted to freak out and sell at a huge loss. From the interactions I had with this business I got the perception that it is completely Sales&Marketing driven, a ton of charm and soft-talking with very little content on actual investing. However the money made in this sector looks quite a lot, software can get a chunk.
A few arguments against paying high fees for stock picking/active recommendations are:
- Sharpe’s one (the guy of the Sharpe Ratio): the return of the market is the weighted average of the returns of active and passive investors. Active investors claim to be able to beat the “market”, but by construction if Passive investors only replicate an index then the the whole Active segment can only make the market return itself. As a counterargument to this professional asset managers claim that they can make money against active retail investors. I don’t have numbers at hand but if you consider the amounts managed by the two sub-segments I don’t think the math can ever work.
- Random stock-genius: A few studies show that if stock pickers were distributed as a Normal then you would expect some of them to outperform the market, even for a good few years in row. That would be even more so if return distributions are not normally shaped but skewed, as they are. In other words potentially even if there are no superior investment abilities in the few that has shown consistent over-performance, you would still expect to observe those few just because of normality. Still you only want to pay for abilities not for luck/randomness.
- Empirical evidence: Simply look at the average returns of stockpickers to see that on average they don’t beat the market.
2. Diving in a “BlueOcean”: WF started going after a huge market massively underserved. Wealth managers need to make a certain absolute amount of money per client managed, therefore in order to have a reasonable fee in % they have high requirements for minimum capital invested. Software brings down the marginal cost-to-serve of an additional client so Wealthfront can do wealth management also for retail clients. Before this segment was almost completely unserved.
A counter-argument here could be that as of today WF distribution effort has been not exactly toward the average retail investors rather toward the wealthy ones.
Still there is no reason why the technology wouldn’t be applicable to the BlueOcean mass-market, I would say their choice of target-segment up to today has been simply the result of the strategy “Let’s first onboard those people that (a) really get what we are doing (b) are probably more influential than the average in their respective communities, so that it will be easier down the line to get to the mass market”.
(ii) Thoughts on marketing for AM startups
An issue in AM online is that it has a very high CAC (in the end the customer is giving you his savings), however the ARPU is low, the CLV being literally distributed across a “life”. So how to get customers effectively is particularly relevant. I read an interesting post from R.Moffat here. This is the attempt of an outsider to add three additional coins to the conversation:
1.Top-down approach: Try to get a specific group, considered an elite, to sign up for the service and get a front page article like “30% of Stanford current class is investing their money via XXX”. To get a reaction of the public like “What is XXX all about? Let me look at it, those kids must know what they are doing”.
2.Leverage user base of another FinTech player: One way to do this could be integrating/bundling offer with an established player in the an adjacent segment to leverage its user base. An example could be with the online wealth manager getting users coming from partnership with other FinTech providers. The rationale would be to target people that already comfortable using these kind of services.
3.Partnership with traditional players: This is what Betterment is doing with RIAs. Don’t know how to go about it, except that incumbents are not going to sit on the fence. Exactly as it is happening in dongle-payments with incumbent retailers developing their own solutions, traditional Asset Managers are going to react, as Charles Schwab is claiming.