WealthTech Start-ups are Tough…
The UBS-Wealthfront deal shows incumbents can sometimes deliver the win-win-win for entrepreneurs, clients and themselves.
After devoting 12 years of their lives, raising 6 funding rounds and carrying nearly $205 million of investor money on their shoulders, the founders of Wealthfront built a start-up generating an estimated $67 million in revenue.
And it could not have been easy. They set out to help Millennials and Gen-Zers better manage their wealth — segments well known for their high expectations, very low willingness to pay fees, and still building up their savings (on average, relatively slower than prior generations).
As a result, the unit economics of standalone digital wealth management service for retail investors can be pretty dire. Customer acquisition cost (CAC) in wealth management is extremely high, estimated at $3,119 per client, according to a recent Kitces Research Report.
Meanwhile, the management fees are razor-thin. At Wealthfront’s 0.25% of AUM fee, you need $40bn in AUM to hit $100m annual revenues. Wealthfront reached $27bn. Rounding-up the top-3, Betterment and Personal Capital reached $29bn and ~$22bn AUM, respectively. And the latter two raised even more capital (Betterment raised $435 million!), and ran for the better part of a decade and a half, to get there.
For Wealthfront, this means the average AUM per client hovered around ~$50,000, generating annual management fees of ~$125-$140 per client. Now, wealth management services might be sticky, but retention rates on robo-advisor apps are below-average in this category; it would be fair to assume that — on a standalone basis — this business is a far cry from the 3:1 LTV-to-CAC ratio rule of thumb.
The only way to make this work then, becomes to increase average revenue per user (ARPU) by offering existing customers additional services. There are several models to achieve this, from referrals to third-party financial service providers, to gradually building out a fully-fledged bank (piece of cake…).
It was perhaps no surprise then, that UBS recently acquired Wealthfront to grow their client base among millennial and Gen-Z investors who will “own an increasing share of the world’s wealth”. And for $1.4bn no less.
While the entrepreneurial community tends to glorify startups and demonize incumbents, could the incumbents be the heroes that come in and deliver a win-win?
Yes, we have all heard Decacorns are the new Unicorns these days… to the point that $1.4bn may not sound like much to some (to me it sounds fabulous). But the UBS acquisition valued Wealthfront at 21x its current annual revenue. That’s a SaaS-style multiple, despite presumably lower gross margins and less net-dollar retention for SaaS, generally speaking. Not a bad deal for the founders (and likely not bad for their investors either).
Meanwhile, UBS gets over 470,000 Millennial and Gen-Z customers at ~$3,000 each, slightly below CAC, in a single sweep.
In the hands of UBS, a ‘full-service’ bank, these younger generation clients could be “the foundation” not just to power the growth of UBS wealth management business, but to cross-sell other financial services (credit, CASA, payments…) and gain share of wallet among millennials and Get-Zers, potentially multiplying ARPU and stickiness, spreading customer acquisition cost among more revenue-generating services -i.e. higher LTV over CAC.
Arguably, there is no reason why incumbents like UBS could not have started Wealthfront, Sony could not have started Spotify, or Marriot could not have started AirBnB.
But tackling these new segments is tough and risky and incumbents have to pick their battles as to when to build, partner or invest.
No doubt, UBS will have to aggressively leverage the acquisition wisely to boost ARPU from Wealthfront’s customer base and beyond, procuring new customers among the new generations. It is a long road ahead, but in this case, buying instead of building might have been a good way to de-risk the play on next-gen retail wealth management for UBS.
Meanwhile, many European competitors, including Credit Suisse and Julius Baer, are sticking to previous generations where the high end of the market and superior profitability may be found today.
By not investing in building engines for their future growth, they may be shooting themselves in the foot.
UBS is not the only one building, and investing in, fintech start-ups in order to stay relevant and fuel future growth though. Goldman Sachs has added its Marcus and Ayco business lines which provide retail wealth management and workplace financial planning, respectively. Marcus was built in house while Ayco was purchased in 2003. Merrill Lynch launched Merrill Edge in 2010 as a self-directed retail trading platform for clients. Morgan Stanley purchased online broker E-Trade in 2020.
These companies understand that building a pipeline and portfolio of new ventures as their engine for future growth, enabling them to tackle new markets and segments with agility, is critical for them to survive and thrive.