Robo-Advice: Business Tool or Business Model?

March 8th at 8:00am by

Last October, Wealthfront raised $64M at a valuation of $700M.  Were Wealthfront a brick-and-mortar adviser, it might command a typical valuation multiple of 2-3X revenue.  Since Wealthfront manages about $1.7B at last public count, on which it charges up to .25%, it should have revenues of around $4M.  That makes it worth, say, $10M?  OK, let’s say $20M, or even $50M!  But $700M?

Wealthfront is a robo-adviser, and robots are different, or so we hear.  These online platforms, which raised almost $300M in 2014 alone, offer automated, algorithmic, model-based portfolio allocation, trade execution, and rebalancing for individual accounts.  Robo-advisers (of which Betterment, FutureAdvisor, and Motif Investing are among the other big names) have much smaller or zero minimum balances, and charge much lower fees (in the range of .10-.40%), than traditional independent advisers.  They promise to offer clean, intuitive interfaces to help everyday investors save and invest in a risk-appropriate and even tax-sensitive way, at a fraction of the cost of a traditional alternative.  They arguably increase investor access to discretionary wealth management, and work to expand consumer choice.  And by pressuring the competition to up their game on service, fees, and risk-adjusted performance, robo-advising might add real value across the asset size and investor sophistication spectra.