The Unique Economics of Wealthfront
By Andy Rachleff
One of the things that really sets Wealthfront apart from other private companies is our unique economic model. Our business model enables us to grow more cost effectively and with higher margins than most startups. This is extremely important because as we explained in Winning VC Strategies To Help You Sell Tech IPO Stock, growth and margins are the ultimate drivers of company value.
A significant portion of our revenue is derived from the 0.25% advisory fee we charge on assets under management. An overwhelming majority of our deposits result from our clients adding on to their existing accounts because, unlike the traditional investment industry, we focus our service on young people who are in the wealth accumulation phase of their lives. In fact, our average client adds approximately 50% of their account value each year. That kind of built in growth is relatively unprecedented for a recurring revenue business.
Another source of growth is market appreciation. Our assets under management should grow by approximately 6% annually on average due to market appreciation. I don’t know of many businesses that have a built in 6% increase in revenues that doesn’t require any marketing effort or expense. However, the downside of this cost-free growth is its high variance. In some years market appreciation can be much greater than 6% (for example 19% in 2017), and in other years it might be negative. When markets turn down, our growth rate temporarily declines, but the good news is it picks right back up when the markets recover. According to our research, the average market correction (peak to trough decrease of more than 10%) takes only 121 days from which to fully recover, so we typically expect to experience a dampening of growth for a short period of time. We also experience much lower withdrawals than the traditional investment industry during market declines because our clients tend to stay true to a passive investing strategy and keep investing despite the volatility.
Unlike most consumer Internet startups, we rely almost exclusively on organic growth. Great companies are built through word of mouth, not by relying on advertising. Customer delight is the greatest form of virality, which is why we put all our efforts into building exceptional products. The secondary benefit of organic growth is it leads to much higher margins.
Our focus on winning through product led us to build a company where the majority of our employees are engineers. Our engineering focus leads us to only do things that can be automated, which means a lot fewer people are required to deliver our services than the traditional approach. We have no sales people or financial advisors. The proof of this leverage is last year we were able to grow our assets under management by 100% and our revenue by 110% while only growing our headcount by 15%. The need to hire fewer people allows us to offer our employees more equity than comparable companies at our stage of development. Delivering all our services exclusively through software leads to very high operating margins over time.
Most people don’t realize how enormous our market is. Baby Boomers have approximately $16 trillion managed on their behalf. By focusing on this demographic Charles Schwab was able to attract more than $3 trillion under management (the average Schwab client is 58 years old). There are more millennials — our target market — than any other generation. It therefore stands to reason that millennials ultimately should have more money managed on their behalf than their parents. We believe that by offering a service that is optimized for millennials we will be in a position to build a Schwab-sized company over time.
By building a truly digital financial services company, we believe we can drive a level of sustained growth and margins that are not typical of a fintech company. Applying this approach to an enormous market should enable us to build a very valuable company over time.
Disclosure
Wealthfront prepared this post for educational purposes for potential employee candidates and not as an offer, recommendation, or solicitation to buy or sell any security. Wealthfront and its affiliates may rely on information from various sources we believe to be reliable (including clients and other third parties), but cannot guarantee its accuracy or completeness. See our Full Disclosure for more important information.
Wealthfront and its affiliates do not provide tax advice and investors are encouraged to consult with their personal tax advisor. Financial advisory and planning services are only provided to investors who become clients by way of a written agreement. All investing involves risk, including the possible loss of money you invest. Past performance does not guarantee future performance.
