Origin stories
Founding myths are powerful narrative devices; an origin story that appears convincing and authentic can attract and unite millions of followers, who will move mountains in service of “the cause”. Cyrus the Great. Romulus and Remus. Jesus Christ. Genghis Khan. Alexander Hamilton. Nelson Mandela.
Origin stories are malleable, fluid narratives; they are revised frequently, sometimes radically. This revisionism prompts interesting questions. Do the true origins of an enterprise, idea, country or movement matter? Is the prevailing interpretation the only one that counts?
Silicon Valley startups offer an interesting example of radically revisionist origin stories, so they offer a useful lens through which to examine the topic.
**********
Act 1: kaChing, baby!
Our story begins in 2008. The golden age of Web 2.0. Put social into anything and you seemingly have a winner.
News bulletin board, but with social = Reddit.
Gaming, but with social = Zynga.
Video streaming, but with social = Netflix.
And so on.
Enter a new startup called kaChing (not a typo). Their strategy? You know by now. Investing, but with social. Total. Game. Changer.
kaChing’s plan was to “rock the investing world”. How? By harnessing the investing smarts of Joe Public. Look, randos on the InterWebz are eventually going to build portfolios that can consistently outperform not just the market, but even the best hedge funds. It’s just a version of the Infinite Monkey Theorem, but applied to investing.
In kaChing’s defense, I am a grumpy old fintech cynic. My fintech rule of thumb is “all fintech is regulatory arbitrage until proven otherwise”. So I am definitely a legacy thinker, unable to recognize fintech innovation even when it’s right under my nose.
So who am I to judge? It might very well be possible for a list of investing “genuises” chosen by some random website to consistently outperform the market. I mean, we can’t be biased by four decades of academic research and real-world proof from the likes of Vanguard, Fama, French, Bogle and Malkiel (let’s remember that name, it will appear later in this story). Surely it’s still possible to find the mythical fountain of sustainable investment outperformance?
And so kaChing continued along its merry path, picking up some funding along the way…
Act 2: PIVOT! PIVOT!
Fast forward to 2010. The Great Recession has shaken investors’ faith in the very existence and persistence of alpha. kaChing’s brand image is particularly gauche in this new era. A strategic pivot becomes necessary. And so, kaChing sheds its active management scales and emerges as Wealthfront, a champion of index investing.
The automated investing revolution has begun! To cut a long story short, both the traditional brokerage incumbents like Schwab and Fidelity, as well as new entrants like Wealthfront and Betterment quickly roll out automated investing solutions. This is not a traditional Silicon Valley story though, since the incumbents quickly eclipse the startups, despite being slower and later to market.
With automated investing “product” now grossly oversupplied vs. demand, the battle inevitably becomes fiercer. Now is when our story becomes interesting, as kaChing reveals its chameleon-like character time and again.
Here is a TL;DR recap of kaChing’s many pivots:
2011: We pick genius investors, they pick winning stocks. You make $$$. Simples!
2013: We now think picking stocks is for losers. We believe index investing, but with software. And we will hire Burton Malkiel to give us a veneer of respectability. Evidently, he wants to be the Robert De Niro of investing (ie DGAF about their reputation).
2015: Schwab is gouging their customers using smart beta, which is a self-serving product anyway. I hope we never lose our way like those corporate profiteering vampire squids!
2017: Smart Beta! We just discovered it and it’s AMAZING. We are so excited to add it to your portfolio.
2018: Smart beta? That’s so 2017…nah, we’re all about risk parity now. Yes, our new fund has a whopping 50bps expense ratio, but investors don’t understand compounding, do they? They also don’t pay attention to opt-ins, so if you have $100K with us, you’re automatically opted-in and we can start skimming higher fees off your portfolio…
20XX: We’re changing our name as we return to our roots: henceforth, we shall be known as kaChing! We are committed to improve your investment performance using software powered by AI & blockchain & [insert new buzzword that justifies higher fees here]!
</end sarcasm>
Act 3: Whitewashing history
Now that you understand kaChing’s tortuous journey and general absence of vision/mission, take a quick look at the entertaining revisionist fiction on display here:
https://www.wealthfront.com/origin
But this shouldn’t come as a surprise. Let’s hear from kaChing’s co-founder, in their own words:
“The most famous companies today…they all changed. None of their original ideas were the ideas on which they succeeded. But they all revise history to make it seem like they did…the mark of a great marketer is they’re a great revisionist.”
How illuminating and profoundly idiotic at the same time.
Illuminating since it reveals that kaChing is fully self-aware of its revisionism, fully self-aware that its many pivots are really in pursuit of new ways to extract money from their customers, not new ways to improve their customers’ returns.
Profoundly idiotic since many (all?) great companies are successful because they continue to live their values, believe in their mission and vision. Google (organize the world’s information). Amazon (Earth’s most customer-centric company). Etc.
**********
Does my rant have a point, beyond the fact that kaChing aka Wealthfront has a habit of shifting its beliefs in pursuit of extracting more money from its customers?
Yes, there are two key points.
First, origin stories matter. They matter a great deal, and it behooves us to examine them carefully. Origin stories can tell you a lot about who has integrity, and who does not.
Second, investing does not need to be “complexity, simplified” (that line is Wealthfront’s current mission statement). Let’s look at some simple numbers, leave alone the impact of compounding them over decades.
A good total market index fund costs ~5bps today . Wealthfront charges 25–50bps on top of the cost of the underlying fund. In other words, a markup of 5–10x.
This is an astonishing and egregious markup. Portfolio re-balancing need not be so complex or over-engineered. Like investing itself, it can be simple, if you have the right framework and rules of thumb. But that is the subject of another post.
If you only remember one thing, let it be this: you shouldn’t pay for financial advice, but if you must, fee-only advice is the only kind you should pay for. Anyone charging a % on your assets is overcharging you. If you don’t understand why, please read the following piece: “Silicon Valley Tech at Wall Street prices”.
Further reading:
