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Why Wealthfront Sold Out to UBS

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What You Need to Know

  • UBS made Wealthfront an offer that the robo-advisor and its VC backers couldn’t resist.
  • It's less clear how the $1.4 billion deal makes sense from UBS' side.
  • Acquisitions of tech platforms by big banks in recent years have not played out well.

“I’m not usually shocked, but this shocks me,” veteran industry consultant Gavin Spitzner said in a LinkedIn post right after the world learned of the head-turning acquisition of the original robo-advisor Wealthfront by the legacy bank and wirehouse UBS. Because Wealthfront founder and former CEO Andy Rachleff has long been a vocal critic of the banking and investing industries, this deal definitely hit the industry with surprise.

“Everyone hates their cable guy, and everyone hates their banks,” Rachleff famously said at an industry conference in late 2019. He immediately followed up that statement in a more conciliatory tone to say, “However, we realized that a checking account is a better entry point for millennials than an investment account.”

Rachleff was commenting on the move Wealthfront had recently made to pivot into online banking as the growth in his robo-advisor was slowing. This was primarily due to everyone realizing that early adopters of robo-advisors were actually do-it-yourself investors who have always been attracted to low-cost options, and not clients with significant wealth and more complex needs that human advisors have typically served.

Since there were no barriers to entry, industry incumbents such as Schwab, Fidelity, Vanguard and even Merrill Lynch quickly launched similar robo-functionality, but with a devastating twist — they offered it “free.” Thus, the venture-capital-backed disrupters were ultimately disrupted by the very same group of incumbents they were trying to displace. Alanis Morissette must have had such a scenario in mind with her hit single “Ironic.”

As a result, Rachleff and his believers are swallowing a bitter pill for having come with much fanfare to disrupt wealth management, only to find themselves thwarted by the formidable power of the human advisor. This undoubtedly encouraged their impatient VC investors to sell out to the first buyer that came along — even if that buyer was the absolute antithesis of their vision, in the form of a 160-year-old bank and wirehouse.

Despite this juicy schadenfreude, when you delve into the details in the UBS offer, it immediately becomes clear that it was a deal that Wealthfront and its VC backers couldn’t resist.

Let’s look at the numbers to see how rich a deal this turned out to be and why Wealthfront had to remove Rachleff and his anti-advisor rhetoric from the CEO slot just months before in order to sell out in a big, big way.

Inside the Numbers

According to stats from TechCrunch, UBS is buying roughly half a million customers for $1.4 billion, or around $3,000 each. The problem with this valuation, though, is that the actual revenue per account is a fraction of that $3,000 purchase price. 

Dividing Wealthfront’s $27 billion AUM by its 470,000 clients equals a relatively small AUM per account of $57,000, and Wealthfront’s pricing schedule of 25 basis points (the first $10,000 is free) means that UBS is paying $3,000 for just $117 of annual recurring revenue (ARR), which is problematic when looked at on an ROI basis. 

Assuming that we use a market return of 7% for the discount rate, no matter how many years I plugged into my net present value calculator, the result was always dramatically negative, meaning there will be no future payoff from current clients. That’s even if those accounts all immediately doubled or even tripled in value tomorrow.

Along these lines, let’s take another look at the numbers from TechCrunch in terms of multiples of revenue to gain further insight. Given Wealthfront’s annual revenue of roughly $67 million, a $1.4 billion deal value creates a revenue multiple of 21 times!

That’s a staggering valuation considering that Schwab paid roughly 4.3 times for TD Ameritrade’s revenue and Morgan Stanley paid 4.6 times for E-Trade’s revenue to acquire those highly profitable and growing digital businesses. 

So there must be other reasons why UBS would pay such a premium for a tech startup that never really started up after more than 14 years — which in the tech world is about 589 dog years.

According to the company release, UBS is touting the ability to now go after “affluent Gen Z and millennial” investors through Wealthfront’s digital platform. That makes sense, but as we have seen, Wealthfront’s recent growth has been only after it started offering banking products and services, not investments. 

And now, with digital industry leaders such as Schwab and Fidelity offering free robo-services, UBS most likely will have to adopt a similar pricing structure just to stay competitive, let alone stop client defections now that the independent, anti-establishment spirit of Wealthfront has been replaced with a massive, centuries-old Swiss bank.

The Big Why

Further rationalizations of the deal, according to UBS, will be its ability to grow and attract affluent next-generation clients through access to remote human advice, a major change in the philosophy and ethos of Wealthfront’s culture to rely only on technology — not people — to deliver advisory services.

Will the 470,000 self-directed clients of Wealthfront who signed up for a digital experience suddenly change their minds and want hybrid tech-and-human advice? And where will UBS get these people — its well-compensated advisory force will not be thrilled to now be working with these relatively tiny accounts. So how can they do this profitably by adding an expense layer of people when the competitive price points are at zero?

To confirm this notion, let’s check back in with our friend Andy Rachleff. “The hybrid model hasn’t worked at all,” he declared at another fintech conference in late 2020. “We’ve been validated in the approach that we take.” He was referring to the fact that Wealthfront users were younger and “wanted to learn this on their own,” not from an aging Generation X or baby-boomer advisor.

Thus, the only answer has to be for UBS to dust off the product playbook and try to cross-sell UBS products to its newly acquired accounts, as well as put those same proprietary products into the Wealthfront robo-portfolios. In fact, that is exactly what CEO Ralph Hamers, Group CEO of UBS, alludes to in the company announcement.

“Following the transaction, Wealthfront and its clients will benefit from access to UBS’s leading wealth management capabilities, including the UBS Chief Investment Office’s best-in-class thought leadership, an unrivaled global footprint, and deep products and services shelf.

Ah — there it is — Wall Street’s product strategy never gets old! 

We will have to let the deal play out to determine whether or not this apples-and-oranges tie-up will ever make sense. History, however, has not been kind to legacy financial services companies buying technology platforms. Most notably, Northwestern Mutual thought that buying the financial planning technology of Learnvest would be a great way to break into the digital advice world.

But as we know, that didn’t work, and it completely shut down Learnvest. Similarly, Principal took a flier on the digital advice platform RobustWealth, had the same result, and shut it down as well. 

What makes this deal even more curious, however, is that UBS actually had invested in and developed a robo-advisor of its own called SmartWealth a few years ago, but ultimately sold it to the startup robo-advisor SigFig, which UBS had a significant investment in, and still relies upon for UBS’ outsourced digital advice offering. In the announcement of that deal, UBS management said that SmartWealth had “limited short-term potential.” 

So why does UBS now think that dropping nearly a billion and a half dollars on another robo-advisor will be any different? And what happens to SigFig as UBS still maintains an ownership interest?

All great questions, of course, but to put this deal in perspective, that $1.4 billion purchase price is a fraction of the nearly $20 billion in fines and penalties UBS has paid over the last 20-plus years, if you include the $2 billion fine UBS just recently received for enabling wealthy French people to evade taxes. So they can afford to roll the dice with yet another robo-advisor.

Ultimately, though, for those keeping score at home, the sad tale of Wealthfront is yet another example of how technology alone will never replace the human touch when it comes to personal finance, investing and helping people achieve their long-term financial goals.

(Photo: Shutterstock)

Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy LLC, a leading consulting firm to the wealth management industry. He can be reached at [email protected] or on Twitter @NexusStrategy.


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