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MARCH 2013 THE MAGAZINE FOR ETF ADVISORS ////////////////////////////////////////////////////////// www.IndexUniverse.com/ETFReport PUBLISHED BY % Wealthfront W ants to reWrite advisory fees

THE MAGAZINE FOR ETF ADVISORS - Wealthfront · PDF filethe magazine for etf advisors ///// march 2013 report published by!% w ... [ fcf yqtmgf kp kpuwtcpeg 5q + jcxg c igpgtcn kfgc

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M A R C H 2 0 1 3T H E M A G A Z I N E F O R E T F A D V I S O R S //////////////////////////////////////////////////////////

www.IndexUniverse.com/ETF!Report P U B L I S H E D BY

!%Wealthfront Wants to reWrite advisory fees

6 IndexUniverse.com/ETF!Report

Odds are pretty high that, if you’re reading this, you’re a financial advisor. You’ve spent years build-ing a business, attracting clients (or just assets) by going to business dinners, group functions or conferences. You’ve identified a specific base of clients—likely in the high-net-worth range of $1 mil-

lion and above—and you’re going after them. While it may have made sense to charge commissions in the past, you know that the best way for you to profit is to collect a fee based on the client’s assets: 1 percent per year sounds about right.

It’s been a good, profitable run. But now there’s a growing threat to that world, intent on turning that model upside down. A new generation of financial advisory firms wants to eat your lunch. Instead of catering to the wealthy, they’re broadening their reach to include a demographic just beginning to grow its assets. Instead of accruing new business with fancy dinners and face-to-face meetings, they’re using social media and a hands-o! approach. They’re educating their clients through seminars and blog posts instead of golf outings and financial buzzwords. And they’re only charging 25 basis points a year for it—no matter how much money you want to invest.

Meet Wealthfront.

wants to shatter the business QSHIP�QSWX�ÁRERGMEP�EHZMWSVW�

use, while helping the next KIRIVEXMSR�SJ�MRZIWXSVW�KIX�

their foot in the door.

SILICON VALLEY’S

"EALTHFRONT

#OODBYE!%

By Cory Banks

Andy Rachle!, left, and Dan Carroll built Wealthfront to o!er

low-cost money management for

the next generation of investors

8 IndexUniverse.com/ETF!Report

Left to right: Jed Broce, Client Relationship Manager; Jim Meyer, VP of Engineering; Adam Nash, Chief Operating O"cer

SILICON VALLEY SWAGAndy Rachleff, Wealthfront’s president and

CEO, has a long career as a venture capital-

ist in Silicon Valley, co-founding Benchmark

Capital in 1995. Dan Carroll, the founder

CPF�EJKGH�UVTCVGI[�QHƂEGT��KU�VJG�PGY�DNQQF��A Chicago native, the 31-year-old had al-

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RGPGF�WRQP�UQOG�QH�JKU�RCTGPVUo�RCRGTYQTM�HTQO�VJGKT�ƂPCPEKCN�CFXKUQT�

p/[� OQO� YCU� C� VGCEJGT�q� UCKF� %CT-TQNN��pCPF�O[�FCF�YQTMGF�KP�KPUWTCPEG��5Q�+�JCXG�C�IGPGTCN� KFGC�QH�YJCV� VJG[� UJQWNF�CPF�UJQWNFPoV�DG�KPXGUVKPI�KP�q�6JG�HCOKN[oU�ƂPCPEKCN�CFXKUQT�JCF�VJGO�KPXGUVGF�����KP�risky stock mutual funds: "juicy" products

HTQO�#OGTKECP�(WPFU�VJCV�RCKF���D���HGGU�VQ�VJG�DTQMGT��#PF�QH�EQWTUG��VJG�CFXKUQT�HCE-VQTGF�KP�VJG�UVCPFCTF����OCPCIGOGPV�HGG�

p*KU� TGIWNCT� ENKGPV� YCU� RTQDCDN[� C� ���OKNNKQP�ENKGPV�q�%CTTQNN�UCKF��p5QOGQPG�YKVJ�C����������RQTVHQNKQ�KU�RTQDCDN[�QPG�QH�JKU�UOCNNGUV�ENKGPVU�q�#V�VJCV�OQOGPV��%CTTQNN�FKF�VYQ�VJKPIU��*G�RWNNGF�JKU�RCTGPVU�CYC[�HTQO� VJG�ƂPCPEKCN� CFXKUQT�� CPF�JG� UQWIJV�VQ�ƂPF�C�DGVVGT�YC[�HQT�VJQUG�YKVJ�UOCNNGT�CUUGV�DCUGU�VQ�IGV�UQWPF�ƂPCPEKCN�IWKFCPEG��

6JG�ƂTUV�RNCP�ECOG�KP�������.KMG�OCP[�successful startups, it had very little to do

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CV�� 6JG� UGTXKEG�� ECNNGF� MC%JKPI�� CKOGF�to use the same methodologies that Ivy

.GCIWG� GPFQYOGPVU� WUG� VQ� GXCNWCVG� GS-

uity managers. “Most people don’t realize

VJCV�+X[�.GCIWG�GPFQYOGPVU�QHVGP�QWVRGT-HQTO� VJG�OCTMGVU�q� 4CEJNGHH� UCKF�� p6JG[�CNN� IGPGTCVG� CNRJC� VJTQWIJ�RWDNKE� GSWKV[�OCPCIGT�UGNGEVKQP�q�

6Q� OKTTQT� VJG� GPFQYOGPVU�� MC%JKPI�evaluated money managers on metrics like

KPHQTOCVKQP�TCVKQ��SWCNKV[�QH�TGUGCTEJ�CPF�JQY�VJG[�UVKEM� VQ� VJGKT�EJQUGP�UVTCVGIKGU��6JG� DWUKPGUU� RNCP�YCU� VQ� EQPPGEV� ENKGPVU�YKVJ�VJGKT�JCPFRKEMGF�CFXKUQT�DCUG��MGGR-

KPI�����QH�VJG�OQPG[�OCPCIGToU�HGG�� +PK-tially, Carroll and Rachleff didn’t think

they could attract the professionals they

YCPVGF� VQ� QWVUQWTEG� KPXGUVOGPVU� VQ�� 5Q�VJG[�VWTPGF�ƂTUV�VQ�COCVGWTU�

%CTTQNN� JCF� RTGXKQWUN[� DWKNV� C� (CEG-

DQQM�CRRNKECVKQP�VJCV�CNNQYGF�KPFKXKFWCNU�to demonstrate that they could outper-

form Wall Street. Using this technology,

the duo opened up their community to

VJGUG� COCVGWT� KPXGUVOGPV� pIWTWUq� KP�JQRGU� VJCV� VJG� RTQHGUUKQPCNU� YQWNF� HQN-NQY��$[�VJG�GPF�����OCPCIGTU�JCF�RCUUGF�kaChing’s evaluation, and 20 of those

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GPVU��p6JG�DCF�PGYU�q�UCKF�4CEJNGHH��pYCU�VJCV�PQ�QPG�ECTGF�q

(KPFKPI� VJG� RGTHGEV� CFXKUQT� YCU� CNN�YGNN� CPF� IQQF�� UC[U� %CTTQNN�� DWV� VJG� DWF-

ding company’s audience repeatedly told

VJGO�VJCV�GXGP�YKVJ�C�OWEJ�UOCNNGT�UGV�QH�CFXKUQTU�VQ�EJQQUG�HTQO��VJG�EJQKEGU�YGTG�VQWIJ�VQ�OCMG��+V�DGECOG�ENGCT�VQ�VJG�FWQ�VJCV� VJG� CWFKGPEG� VJG[� HQWPFtPQXKEG� KP-

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6JCVoU� YJGP� %CTTQNN� CPF� 4CEJNGHH�DWKNV�9GCNVJHTQPV��

9MARCH 2013

Left to right: Qian Liu,

Director of Investment Research; Amy Lee,

Senior Software Engineer; David Fortunato,

Chief Technical O"cer

Je! Rosenberger, VP of Investment Research

PROCESS9GCNVJHTQPVoU� HQWPFGTU� DGNKGXG� VJGKT� UWE-EGUU� KU� VKGF� VQ� VJG� ENKGPVUo� QXGTCNN� GZRGTK-GPEG��6JG�ƂTOoU�KPXGUVOGPV�RJKNQUQRJ[�KU�UKORNG��CPF�NKMGN[�HCOKNKCT�VQ�CP[QPG�YJQ�JCU�KPXGUVGF�KP�VJG�RCUV����[GCTU��*QY�VJG[�GZGEWVG�KV�KU�VJG�UGETGV�UCWEG�

*GTG�CTG�VJG�DCUKEU��7UKPI�'6(U��VJG�ƂTO�RWVU� C� ENKGPVoU�OQPG[� KP� C� RQTVHQNKQ� QH� UKZ� asset classes:

r U.S. stocks

r� �(QTGKIP�FGXGNQRGF�OCTMGV�UVQEMUr Emerging market stocks

r Real estate

r Natural resources

r Bonds

A potential client comes to the com-

RCP[oU� YGDUKVG� CPF� RTQXKFGU� VJG� UVCTVKPI�amount of money they’d like to invest,

CNQPI� YKVJ� JKU� QT� JGT� CIG�� (TQO� VJGTG��Wealthfront’s site takes the potential cli-

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6JG�ƂTO�EJCTIGU�������KP�HGGU�HQT�RQTV-HQNKQU�KP�GZEGUU�QH����������6JGTG�KU�PQ�HGG�HTQO� ������� VQ� �������� CPF� VJG� ƂTO� CNUQ�does not charge commissions. All of the

ENKGPVoU�OQPG[� KU�DTQMGTGF�CV�#RGZ��YJKEJ�

9GCNVJHTQPV�ECNNU�C�pYJKVG�NCDGNq�DTQMGTCIG�;QW�ECP�YCNM�VJTQWIJ�VJKU�RTQEGUU�CPF�

see the portfolio for free. In fact, it’s only

after you see this information presented

on the screen that Wealthfront even asks

for your name.

6JG�UKZ�'6(U�VJCV�9GCNVJHTQPV�WUGU� HQT�its clients are largely Vanguard offerings,

including the Van-

IWCTF� 6QVCN� 5VQEM�/CTMGV�'6(�86+��HQT�U.S. stocks and the

Vanguard Emerging

/CTMGVU�'6(� 891��for emerging mar-

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All of this takes place automatically

KP� [QWT� CEEQWPVU� QPEG� [QW� UKIP� WR� YKVJ�9GCNVJHTQPV��;QW�ENKEM�C�DWVVQP�CPF�[QWoTG�done; Wealthfront keeps you positioned on

VJG�GHƂEKGPV�HTQPVKGT��CV�C�NGXGN�CRRTQRTKCVG�for your risk tolerance, and does that for

������C�[GCT��OCZ�

DIFFERENT FEEL+P� C� NQV� QH�YC[U��9GCNVJHTQPV� FQGUPoV� NQQM�UQ�OWEJ� NKMG�CP�CFXKUQT[�ƂTO�CU� KV�FQGU�C�UQHVYCTG� FGXGNQROGPV� ƂTO�� 6JG� QHƂEGU�

are open: Only the conference room and

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IKPGGTU��PQV�ƂPCPEKCN�YQPMU��0Q�QPG�YGCTU�C�UJKTV�CPF�VKGtECUWCN�FTGUU�KU�VJG�QTFGT�QH�VJG�FC[��6JG�5KNKEQP�8CNNG[�UVCTVWR�HGGN�KU�D[�

design; it helps the

ƂTO� TGNCVG� VQ� KVU�core audience.

Unlike most ad-

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UVCTVWRU�NKMG�&TQRDQZ�QT�;GNR�WUG��TGN[KPI�OQTG� QP� YQTF�QH�OQWVJ� OCTMGVKPI� CPF�referrals than traditional advertising.

WEALTH FRONT’S SWEET SPOT IS THE PERSON

IN THE WEALTH-ACCUMU LATION STAGE

10 IndexUniverse.com/ETF!Report

//////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////

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pitches, the seminars

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tion and protection.

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front’s service is also clearly not designed

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+P�&GEGODGT�������VJG�ƂTO�CPPQWPEGF�VJCV� $WTVQP�/CNMKGN�� VJG� HCOGF� 2TKPEGVQP�University economist and author of “A Ran-

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p9G�FQPoV�FKUENQUG�QWT�CUUGVU�q�JG�UCKF��When pressed, he added, “We feel that

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anniversary. De-

tractors may say

that the lack of

assets or a less-than-three-year track record

UJQWNF�UECTG� KPXGUVQTU�CYC[�CPF�DCEM�KPVQ�the hands of traditional asset managers.

THE NEW WAVE9GCNVJHTQPV�KU�LWUV�QPG�ƂTO��DWV�KVoU�RCTV�QH�C�PGY�YCXG�QH�VGEJ�FTKXGP�CFXKUQT[�JQWUGU�VJCV� TGRTGUGPV� C� TGCN� CPF� UKIPKƂECPV� EJCN-NGPIG� VQ� VTCFKVKQPCN� YGCNVJ� OCPCIGTU�� 6Q-

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Countless research studies have

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ered costs and commoditized portions of

VJG� TGVCKNKPI� GPXKTQPOGPV�� KV�YKNN� FQ� VJG�same to the advisory market.

“Most advisors use some form of mod-

GTP� RQTVHQNKQ� VJGQT[�q� UCKF� 6QO� &QTUG[��president and co-founder of Dorsey Wright

�� #UUQEKCVGU�� p6JG� FKHHGTGPEG� KU�� =9GCNVJ-

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XKFG� VGEJPQNQI[�FTKXGP� KFGCU�� 6JG[oTG� PQV�looking at performance, they’re looking at

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$WV� YJKNG� VJG� KPPQXCVKQP� OC[� DG� KO-

RTGUUKXG�� &QTUG[� CNUQ� UGGU� KUUWGU�� (QT� QPG��JGoU� C� ƂTO� DGNKGXGT� KP� VCEVKECN� CNNQECVKQP��But more importantly, he fears that the

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end. Because I don’t think they have a lot of

OQPG[�WPFGT�OCPCIGOGPV�TGNCVKXG�VQ�YJCV�a traditional money manager may have. But

they’re on the right track, and technology is

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Dan Carroll explains how Wealthfront’s focus on technology helps keep

costs low for its clients

WEALTHFRONT IS JUST ONE FIRM, BUT IT’S

PART OF A NEW WAVE OF TECH-DRIVEN

ADVI SORY HOUSES