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Cresto Narang Wealthfront .pdf



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Autore: Alberto Cresto - Skand Narang

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ESCP EUROPE

Monographie –
Wealthfront Inc.
Strategy Course - 2015

Alberto Cresto - Skand Narang
11-21-2015

1 Introduction
The aim of this monography is to analyse Wealthfront strategy and its competitive
advantage in the Wealth Management industry.

1.1 Wealthfront History

Andy Rachleff and Dan Carroll founded Wealthfront in 2008 as kaChing, a mutual-fund
analysis company, before pivoting into wealth management.
Its Chief Investment Officer is Burton Malkiel, the worldwide famous theoriser of the
“Random Walk” theory for future asset prices. The management team is made by
experienced professionals from both the technology and investment industry.
Since its debut in the industry, Wealthfront has enjoyed a sustained strong growth,
synthesised by the chart below:

Million $ Under Management

Wealthfront Growth
3000

CAGR= 714 %

2500
2000

Wealthfront

1500
1000
500
0

2012

2013

2014

2015

https://blog.wealthfront.com
1.2 Mission and Value Proposition
Wealthfront’s mission is to propose a world-class investment service to anyone in the world.
The value proposition is to provide high-level investment strategies with the lowest
minimum account and charging the lowest fees in the industry, by leveraging on process
automation. In doing so, the firm is devoted to provide full transparency and accessibility,
along with an outstanding degree of customisation to customers’ needs.
The value proposition is extremely relevant with respect to passive portfolio management,
the one Wealthfront provides. Passive management is a strategy who aims at replicating
indexes’ (ETFs) and markets’ performances, based on the underlying assumption of market
efficiency, i.e. it is not possible to outperform the market. Under this type of investment
management, human intellect is much less relevant than in active management (which aims

1

at outperforming the market by investing in high-growth potential asset) and is rather based
on quantitative diversification strategies (See Annex A). This means automation would be
able to provide a higher value at a lower cost: this monography will show how.

2 Relevant questions
As we have analysed so far, Wealthfront seems to be a highly innovative company. Despite
that, innovation has not always induced the obtainment of a competitive advantage.
Considering that not many analyses have been performed and not many information are
available on this company, we will apply some theoretical frameworks to determine
whether a competitive advantage exists. In particular, the questions we want to answer are:







What are the external factors that can favour or prevent the obtainment of a
competitive advantage?
Does artificial intelligence provide a competitive advantage in the asset management
industry? What are Wealthfront’s sources of competitive advantage?
Is the competitive advantage based on innovation?
o What are the sources of innovation?
o What are the factors influencing the pace of innovation diffusion?
o Is this a product or process innovation?
What are Wealthfront’s opportunities and threats?
Can Wealthfront open a Blue Ocean?

3 What Are The External Factors That Can Favour Or Prevent
The Obtainment Of A Competitive Advantage?
3.1 Strategic Analysis Of The External Environment
The analysis was carried out at four levels:

Macro environment: a PESTEL analysis was performed in order to analyse the macro
environment and determine the pivotal variables. In addition, based on the
conclusion of the PESTEL analysis, a scenario analysis was performed.
• Industry: three frameworks were used to analyse the industry, i.e. the lifecycle
analysis, the Porter’s 5+1 forces, and the analysis of the competitive system.
• Competition: a strategic groups analysis was performed.
In addition, a market level analysis was carried out at the end of this document (section 5,


Blue Ocean Analysis)

3.1.1 Macro Environment
3.1.1.1 PESTEL
Six elements of the macro environment are considered using the PESTEL analysis.

2

3.1.1.1.1 TREND ANALYSIS
3.1.1.1.1.1 POLITICAL
From the political side, there is more pressure on large financial institutions to reduce
systemic risks.
In addition, especially in Europe, there is strong political pressure on companies for issues
related to privacy and management of sensitive data, as well as data security and
transparency.
3.1.1.1.1.2 ECONOMICAL
Interest rates are at record low level and so investors are constantly looking for better
risk/return opportunities. Regarding interest rates, they are expected to increase in the
medium term in USA and remain low for the medium term in Europe.
Regarding the dimension of the asset management industry, Global Assets Under
Management are increasing around the world, following the financial crisis; equity markets
in particular have rebounded after 2008. In this regards, most of the major investment
management players are experiencing net inflows in assets under management, especially
in Europe.
It must be said that, after two financial crisis, many analysts expect the economy to recover
in the medium term. In addition, following the quantitative easing program pursued by
major central banks, many players have excess liquidity. This can be favourable to the asset
management industry.
In addition, following the financial crisis and the difficult economic situation that many
countries are experiencing, investors are more risk averse. This means that their demand for
low risk profile investment has increased.
3.1.1.1.1.3 SOCIAL
There are a couple of trends that must be analysed. Firstly, pensions are lower, and more
people are concerned with the management of their retirement funds. This is especially true
in Europe and North America. In addition, people are becoming more autonomous when it
comes to financial management decisions. In these regards, some people are more
emotional than others regarding money: some need to know that someone (i.e. not a
machine) is managing their investments. On the other hand, more and more people,
especially young generations, are more confident in technology. People are looking for more

3

transparent and easy to understand investment tools. In addition, people require 24/7
access to information and solutions.
Secondly, there is a growing lack of confidence in banks and existing providers of financial
services. This is especially true for millennials, who have lived through two market crashes in
the last years.
Thirdly, the new generations are more interconnected, informed, and very demanding.
Lastly, the number of high-net-worth individuals, those with more than US$1 million of
investable assets, continues to grow, especially in USA, where the number of entrepreneurs
is increasing exponentially. This is also true in Asia, especially in India and China.
3.1.1.1.1.4 TECHNOLOGICAL
There are several technological innovations that are shaping the international landscape,
and in particular the asset management industry.
Firstly, computers are faster and more interconnected. Internet increases access and
reduces costs to many solutions, especially in the financial sectors.
Secondly, the number and use of smartphones is increasing dramatically.
Lastly, a lot of research is going on regarding big data science and machine learning. In
addition, research on finance is proving that portfolio allocation techniques work as
expected in the long term. This doesn’t seem to be true for investment activities performed
in the short term (relevant for the hedge fund industry).
3.1.1.1.1.5 ENVIRONMENTAL
A growing number of funds are starting to take into consideration sustainability indices
when taking investment decisions. Apart from that, no trend seem to be so disruptive in the
environmental landscape that can shape the financial services industry.
3.1.1.1.1.6 LEGAL
The legal aspect is very important in the investment management industry. Firstly, “in
October 2013, the SEC opened private investments to the general public in response to the
crowd funding provision (Title III) of the JOBS Act. This will enable start-ups to reach a much
broader investment audience than securities laws used to allow” 1.
Secondly, “new rules on international compliance and transparency have radically changed
the climate for tax havens. The two most significant changes, so far, are the U.S.
1

PwC, “Robo advisory vs. human advisory”, 2015

4

government ’s new Foreign Account Tax Compliance Act, which places pressure on banks in
every country to disclose the bank accounts of U.S. citizens, and the new withholding tax
agreements between the U.K., Austria, and Switzerland. The general consensus is that the
Organisation for Economic Co-operation and Development will ultimately push for full tax
transparency among all its member states, with automated information exchange becoming
a new reality for offshore banking. If this proves to be the case, players will need to reevaluate their offshore strategies. They will feel pressure to withdraw from some offshore
markets and to focus on those where they have a clear value proposition, growth prospects,
and proper compliance capabilities. Many governments are taking a tough line with tax
evasion. UBS’s settlement with the U.S. Department of Justice for allegedly helping U.S.
citizens evade taxes underscores the determination of regulators to close loopholes.” 2
All these means that the financial services industry is undergoing a period of intense
scrutiny, and companies are investing in compliances in order to respect the law, which is
changing at a fast pace.
3.1.1.1.2 HIERARCHY
1. Social – clients are changing and they require more sophisticated and easier
products to understand.
2. Technological – technology is allowing to scale and provide more and more people
with services once reserved for a niche.
3. Economical – economy is improving after the financial crisis.
4. Political & Legal – there is more pressure on financial institutions regarding sensitive
topics such as: data security, privacy, and systemic risk.
5. Environmental: not a real driver.
3.1.1.1.3 PIVOTAL VARIABLES
Social and technological – people are changing and they demand transparency, simplicity
and full access 24/7. Technology is allowing this. These two elements are likely to shape the
financial services industry in the near future.
3.1.1.2 Scenario Analysis
We have decided to build a scenario analysis on two variables:


2

Social – Acceptance of robo-advisors by the public: will the robo-advisors industry be
able to convince investors that algorithms can successfully manage assets in the long
term, especially through financial crisis?

Strategy&, “Global wealth management outlook 2014–15”, 2014

5

Economical – Will the economy rebound? Are normal people going to have more
wealth to invest?
We have decided not to analyse the technological factor, i.e. the second pivotal variable


identified in the PESTEL analysis, as this appears to be highly correlated with the social
variable identified above.
Normal people with more wealth to invest
Robo-advisors
accepted and
entrusted by
investors
Robo-advisors not
accepted by
investors

(A) Robo-advisors are likely to experience
tremendous growth and capture a growing
client base
(C) Established asset managers are likely to
start offering products for normal investors
(i.e. not only high net worth individuals), taking
advantage of the technological progress
achieved thanks to robo-advisors, by
leveraging on their established brand

Normal people with less/same
wealth to invest
(B) Robo-advisors will experience high
growth rate, with assets under
management growing at a lower
growth rate than in scenario A
(D) The asset management industry
won’t experience drastic changes

3.1.2 Industry
3.1.2.1 Lifecycle of the industry
The robo-advising industry is relatively young and seems to be at the hedge between the
emergence and growth stage. This is because:






There is still a lot of resistance from users and academics on whether algorithms are
actually better than human in managing money on the long run, especially during
financial crisis.
There are not a lot of players, but the services offered start to become less
diversified.
Profits start to increase.
Barriers to entry are not too high.

6

3.1.2.2 Porter 5 Forces
3.1.2.2.1 DESCRIPTION
3.1.2.2.1.1 POTENTIAL ENTRANTS
At this point in the market cycle, the robo-advisors market does not appear mature. On the
other hand, if the market proves to work, it is likely that many more entrants are going to
step in. There are a number of elements that must be considered.
There are considerable barrier to entrance, mainly because:





Companies need to invest a considerable amount of money in order to acquire the
technology and the know-how to become a real competitor and get a solid track
record that can appeal investors.
Once a company has a proved track record, a considerable amount of money must
be spent on marketing.
Brand and track record plays a major role in the financial management industry.

At this point in time, many players that are not backed by major asset managers must get
funds from Venture Capitals (i.e. higher barriers to entry).
It must be said that technology allows robo-advisors to scale quite quickly because the
marginal cost per client is extremely low.
From a regulatory point of view, there does not seem to be a specific limitation to potential
entrants. On the other hand, it is likely that, if the market becomes more populated, the
scrutiny from regulators will increase.
One point that might facilitate the entrance of new players is the diversification effect:
investors might prefer not to invest all their money on one only platform but they might
prefer to diversify.
From 1 to 10, the threat from potential entrants ranks at 7 out of 10 and, if the market
proves to work, this threat will become more serious.
3.1.2.2.1.2 SUBSTITUTE PRODUCTS
The main substitute are investment management funds that offer mainly passive funds;
these can allow investors to track indices and optimize their investment opportunities3.
These are large firms such as State Street, Blackrock, J.P. Morgan Asset Management…, very
large companies with considerable investment capabilities. They are a serious threat to

We are considering mainly passive investment strategies because they seem more comparable to the kind of
products offered by robo-advisors.

3

7

robo-advisors because they can make large marketing investments. In addition, they might
step in and become new entrants if robo-advisors proves to work in the long term.
Moreover, the costs of moving back to established investment manager is quite low. These
elements increase threat from substitutes. On the other sides, there is more attrition
between investors and major financial services firms. This might help robo-advisors to gain
market share and persuade investors to place money on automated platforms.
From 1 to 10, the threat from substitutes is very high and ranks at 9 out of 10 and it is likely
to increase.
3.1.2.2.1.3 SUPPLIERS
There are two major kind of suppliers.



Suppliers of IT infrastructure: they do not seem to have a major contractual power
because suppliers are not concentrated and they sell commodity-like products.
Suppliers of financial data: they might have more contractual power because there
are not a lot of providers of financial data. Suppliers include Bloomberg and Reuter.

From 1 to 10, the threat from suppliers ranks at 4 out of 10 because the real threat may
come from provider of financial data, but this does not seem to be very serious. This is
expected to remain flat.
3.1.2.2.1.4 CLIENTS
At this stage of the market, clients are not concentrated and invest relatively small amount
of money, when compared to asset invested in major investment management companies.
Fares are usually standardized for small investors, and regulators forbid investment
management companies from treating customers differently. Once the assets under
management increases and investors will become more concentrated and powerful, it is
possible that fares might change in order to accommodate large clients, but for the
moment, clients don’t seem to have a major contractual power. On the other hand, it is
quite easy for customers to switch investment manager.
From 1 to 10, the threat from clients ranks at 6 out of 10 and, if the market proves to work
and become bigger, this threat will be higher.
3.1.2.2.1.5 GOVERNMENTS
The regulation in regards to investment management is quite strict and it is possible that, if
the robo-advisors market becomes bigger and more important, the focus of regulators will
increase. There does not seem to be a specific law that can prevent players to enter the

8

market. In addition, for the moment, governments are not clients, but they may become it
in the future.
From 1 to 10, the threat from government ranks at 6 out of 10 and, if the market becomes
more important, this threat will become more serious.
3.1.2.2.1.6 COMPETITIVE RIVALRY
The competitive rivalry is not very high because the market has exponential growth
opportunities and there is a lot of room to differentiate. In addition, the barriers to entry
and exit are still reasonably low.
At this point, the competitive rivarly is medium and ranks at 6 out of 10, but this will
definitely become more important if the market become bigger and more populated.
3.1.2.2.2 RANKING
The threat from substitute is, at this point, the most important. In fact, substitutes are very
large companies and they might become entrants if the market proves to work.
Entrants
10
8
Intensite cuncu

6
4

Clients

2
0

Suppliers

Government

Substitutes

3.1.2.2.3 KEY SUCCESS FACTORS
The key success factor is to win the resistance from investors, who may not accept the fact
that their money are invested by an algorithm (this is particularly true during financial
periods of financial turmoil). If this can be achieved, than marketing investments will be key
in attracting normal people that might be interested by the low entry account and low
management fees.

9

3.1.2.3 Analysis Of Competitive System
At this point in the life cycle of the industry, it seems that there are several differentiating
factors in the industry particularly in terms of technology offered and service. For example,
some companies may decide to offer customers a human interface.
On the other hand, the algorithms used to invest are inspired from the general consensus
and academic research, but then they are refined and represent the key competitive
advantage, which is quite strong.
For these reason, the competitive system appears a specialized system.

3.1.3 Strategic Groups Analysis

We have analysed the different players in the market by plotting two variables:



Activity perimeter: price. We used the minimum size of an account that can be
opened at a specific asset manager
Resources allocation: dimension of the organization. We used the total asset under
management.

More specifically, without considering the medium investment firms for Ultra High New
Worth Individuals:

10

By analysing the different companies, we determine four strategic groups:


Robo-advisors and small investment firms: these are small companies, with less
than $500bn of assets under management. In this group, we define:
o Robo-advisors and very small investment firms: these are the real peers of
our company. These companies target people with a relative low income
(around $30k to $50k per year). This is a group of very small companies with
extremely small minimum account.
o Small investment firms: these are relatively small investment management,
with AUM between $200bn and $500bn, that accept relatively small accounts
(less than $3M accounts), such as Investec Wealth & Investment.



Medium investment firms for ultra-high net worth investment: these are
investment firms with around $500bn of assets under management that requires
extremely high minimum accounts, such as Goldman Sachs Asset Management.



Large asset management firms: extremely large amount of assets under
management with relatively small minimum account but with no customisation, such
as Fidelity and Blackrock.

4 Does artificial intelligence provide a competitive advantage
in the asset management industry? What are
Wealthfront’s sources of competitive advantage?
4.1 Wealthfront’s Strategic Capabilities from a Resource-Based View

The capabilities of an organization are the set of resources and competences that contribute
to its long-term survival or competitive advantage. In particular, resources:

11




Resources are the material or immaterial assets possessed or under control of an
organization.
They can be threshold (ones needed to meet necessary requirements to compete in
a given market) or distinctive (able to provide a competitive advantage).

Competences:



Competences are activities or processes from which an organization exploit its
resources.
They can be threshold (ones needed to meet necessary requirements to compete in
a given market) or distinctive (able to provide a competitive advantage).

Accordingly, the nature of resources and competences determine if a capability is threshold
or distinctive.
The following is the analysis of Wealthfront capabilities from a resource based point of view:
Capabilities
Asset Allocation
&
Portfolio
Creation





Profit
Maximisation



Information
Creation
and
Accessibility



Front Office and
Market Coverage




Compliance



Resource
Threshold
Distinctive
To have
• Artificial
asset under
Intelligence to
managemen
support few
t
employees
To have
qualified
professional
s
To have
• Artificial
qualified
Intelligence to
professional
support few
s
employees
To have
• Artificial
qualified
Intelligence to
professional
support few
s
employees

To have a
point of sale
To have
qualified
professional
s



To have
qualified
professional
s





Unique POS
online
accessible
from any
country
Artificial
Intelligence
Artificial
Intelligence
programmed
to be
compliant



Competences
Threshold
Distinctive
To have asset
• Allocation
allocation expertise
process fully
automatized



To have investment
expertise



Position
optimisation
fully automated



Making the client
able to access its
information 24/7



Real time
information
available at any
time
Information
generation fully
automated
Front office
process fully
automated





Understanding
client needs





Ensure compliance
of processes and
employees



Be compliant

12

4.1.1 Dynamic Capabilities

Wealthfront’s strategic capabilities are characterized by a high dynamicity: Wealthfront can
easily reconfigure its artificial intelligence to satisfy customer-changing need or to adapt to a
new competitive landscape. Wealthfront flexibility must be analyzed differently with regard
to the competitors’ nature:




Robo-advisors can reconfigure process as Wealthfront does. Compared to roboadvisor competitors, Wealthfront is able to react and change quicker thanks to its
first mover’s advantage, analyzed later in this monography. Indeed a much more
comprehensive part of robo-advisors customers helps the firm to anticipate changes
and adapt faster.
Compared to traditional passive funds, Wealthfront has a tremendous advantage in
terms of adaptation capacity: technology is more easily reconfigurable than people,
both in terms of cost and time.

When addressing a firm capacity to change and adapt, it might be useful to take into
account its culture and its eventual path dependency:




Wealthfront proudly declares to be a technology company, an evident result of last
years’ wave of innovation. It is a company born and raised in a fast moving
environment and well conscious of today customer’s changing needs. Its
management comes in majority from the technological space and it hasn’t any
preconception towards the industry in which it is currently operating.
Traditional wealth management firms, and their managers, have on their shoulders a
history made of centuries of traditions and industry practices. Management is likely
to suffer a strong path dependency, as demonstrated by the fact that the wealth
management industry has always been targeting a wealthy niche through the same
strategy.

4.1.2 Strategic Capacities Diagnosis and Sources of Competitive Advantage

Now a more comprehensive analysis of Wealthfront capabilities will help us understand
whether each of those contribute to the achievement of a competitive advantage and, if
yes, what the nature of this advantage is.
4.1.2.1 Asset Allocation and Portfolio Creation:
Wealthfront leverages on a fully automated allocation and portfolio creation process. This
process in based on inputs provided by the customer in order to create a tailored
investment profile: age, personal income, family income, number of dependent without
income (e.g. sons)…

13

Created the customer risk profile, Wealthfront proposes a draft portfolio, which can be
manipulated changing risk tolerance, divided in few ETFs of different nature (American
Stocks, Emerging Market Stocks, Bonds, Commodities …).
Compared to other assets, ETFs are financial indices characterized by a high degree of
diversification. The risk linked to each ETF can be diversified as well as the investment
shared amongst different ETFs; Wealthfront’s software is programmed to provide the
highest degree of diversification (and thus the minimum risk) for a certain risk level.
In addition, Wealthfront is able to create portfolios that a single investor but also many
wealth management firms would struggle to replicate. In fact, via Wealthfront, even a 500 $
portfolio can comprehend 6-7 investments in different assets. This is due to the fact that
Wealthfront, using only a restrict number of products on which it has huge aggregates
positions, is able to provide diversification even to the smallest of its account. This happen
by breaking the link between the customer’s investment in an asset and the price (size) of
the asset: the amount invested in an asset on behalf of a single customer is not anymore a
multiple of the price of an asset. It must be considered that, in a traditional mutual fund, an
investor would invest directly in the fund and not on a personalized portfolio, as opposed to
what Wealthfront allows investors to achieve.
Thanks to automatization, Wealthfront is able to provide these strategies, before only
available to the High and Ultra High Net Worth Investors, to any of its customer with a
minimum investment of 500 $ and no fees up to 10 000 $ in invested capital.
Benefits for customer linked to Wealthfront Asset Allocation process are:







High degree of diversification: the complex mathematical nature, the cost associated
with the information and the computational power make diversification strategies
based on quantitative models almost unachievable for private investor outside the
wealth management space.
A portfolio tailored on customer needs and preferences
A process freed from human errors
A level of service and performance non provided by traditional passive funds
A lower price and in certain case a service free of charge

All these benefits create a consistent competitive advantage based on differentiation.
From Wealthfront point of view, the automatization leads to a massive decrease in
operational cost, with two extremely important implications:

14




Serving a customer cost less than ever, expanding the universe of potential clients to
segments never reached by the industry offer.
Wealthfront variable cost associated to a new customer is almost 0, allowing for free
of charge accounts and boosting its expansion.

This creates a consistent competitive advantage based on cost leadership.
4.1.2.2 Profit Maximisation
Artificial intelligence allows Wealthfront to take care of its customers’ account 24/7. Indeed,
the best level of service would require a wealth manager to optimize client’s position at any
point of time in order to realize gains and avoid losses. But this is not case for the
traditional asset management industry nor for private investors.
In traditional wealth management firms, only a fraction of time available is devoted to each
customer in order to carry on these activities. This is due to the fact that any professional
follows multiple accounts and has a limited amount of time. Similarly, a private investor has
a limited time to follow their investments.
In Wealthfront, any activity involved in the monitoring and optimization customer portfolio
is fully automated and carried on 24 hours a day, seven days a week.
The most recurrent instance when profit maximization is needed is when a tax loss
harvesting is available 4. This practice in Wealthfront has increased benefits because:




Saves the customer transaction cost: since all of Wealthfront positions are in few
ETFs, the sales and consequent acquisition of assets is likely to occur at an aggregate
level rather than at the single customer’s portfolio level.
Increase in the probability of tax loss harvesting occurrence (which requires at the
same time a position generating a profit and one generating a loss), due to the
higher degree of diversification.

Again, we can analyze the implication from both customer and organization point of view:
For customer:




Private investors can access a service prior reserved to only to the wealthiest
Both traditional WM clients can access a much higher level of services in terms of
time dedicated to their portfolio
A faster, non-stop, and free from human errors process

All these benefits create a consistent competitive advantage based on differentiation.

The compensation of taxable financial gains with realization of losses achieved by the sales of negative
positions. The proceed of the sale is then reinvested in a similar asset.

4

15

For Wealthfront, this means a strong reduction in operational cost (especially the variable
part) which concurs to create a consistent competitive advantage based on cost leadership.
4.1.2.3 Information Creation and Accessibility
The accessibility and the creation of the financial information are two requirements directly
imposed by the regulator to the asset management firms. Indeed, information plays a key
role for customer in this industry both in terms of frequency and accessibility.
Traditional firms spend time and resources at providing this information at regular intervals
and making it available via multiple points of access.
Wealthfront, thanks to process automatization, is able to reduce costs associated with these
activities and produce the necessary information almost in real time.
This concurs to create a competitive advantage based on cost leadership.
On the other hand, as a third millennium startup, it is well aware of the importance of
making this information available at any time and from anywhere to its clients: Wealthfront
clients are indeed able to access it from any device and at any point in time, having thus the
key information of their portfolio always with them.
More customers are able to take important financial decision in the same way: position can
be closed, augmented or changed easily and within few seconds.
This concurs to create a competitive advantage based on differentiation.
4.1.2.4 Front Office and Market Coverage
Many traditional asset management firms need a huge deployment of resources and
competences to cover a new market while Wealthfront can easily expand into new market
by simply launching a translation of its main website and, of course, being compliant and
oversight by the national financial authority.
This is due to the fact that Wealthfront, in terms of resources and competences, can
leverage almost entirely on its algorithms. The automation is in fact concerning also the
comprehension customer needs in order to build a specific investment profile in few
minutes.
This concurs to create a competitive advantage based on cost leadership.

16

From the customer point of view instead, this means having access to Wealthfront services
from wherever in the world: even in countries in which Wealthfront is not legally present,
customers can connect to website and invest 5.
This concurs to create a competitive advantage based on differentiation.

4.1.3 The VRIO Analysis

In order to understand whether these capabilities can lead to a competitive advantage, and
to understand the durability of this advantage, we conduct now a VRIO analysis for each
capability.

Value
Rarity
Inimitability
Organisational
support

Assets
Allocation

Profit
Maximisation

V
V
X
V

V
V
X
V

Information
Creation
and
Accessibility
V
V
X
V

Front Office and
Market
Coverage
V
V
X
V

Compliance
V
V
X
V

As we have seen in previous sections, all the capabilities analyzed provide value to the
customer by:




Increasing the level of service
Providing a higher degree of customisation
Reducing costs and consequently reducing or even eliminating the price

At the same time, they are rare because they are based on complex software and
algorithms, whose intellectual rights are not public.
In addition, the organization seems to be well organized to exploit at its best the
competitive advantages linked to these capabilities: Wealthfront is a new generation
enterprise defining itself as a technology company. More than an established player trying a
new venture, Wealthfront is an organization that proposes technology as the core of its
value offer.
On the other hand, these capabilities are certainly not inimitable: others robo-advisors are
already present in the competitive scenario and more are likely to come. Still the result of
the analysis is that Wealthfront has a temporary competitive advantage based on
differentiation and cost leadership.
Even though the competitive advantage will disappear over time, Wealthfront will enjoy the
Pioneer Advantage, which is the subject of another part of this monography.
This investments are treated as investments in foreign country and the customer itself is responsible to
report gains in his home country

5

17

4.2 Traditional Targets in Wealth Management and Wealthfront
Target

The Wealth Management industry has historically focused on few wealthy clients, capable
of paying relatively high fees in order to have their wealth managed by professional. There
are, of course, various segments inside this universe, and different firms target different
customers, depending on their income: these differences are captured by the minimum
capital to access the service. This strategic choice has been based on the fact the time spent
at managing lower income segment money were not considered profitable and partially by
the fact, expressed above, that certain strategies do require high capital invested.
As we can see from the representation below, the average lifetime opportunity linked to a
client for an asset management firms is relatively low (apart for High and Ultra High Net
Worth Investors). One should also consider that, despite the income for a wealth
management firm varies consistently, the time spent to manage the wealth is rather
homogenous across segments.

IBM Matching customers with capabilities
This conception has left the majority of the population without any access to the benefits
associated with a professional management of savings. The result is an entire industry
focusing on niches leaving unserved the biggest part of the population.

18

Wealthfront, thanks to its technology, is now able to serve and make profitable this huge
part of the market and, as seen above, is able to reach it easily across countries.
On the other hand, Wealthfront strategy is relevant also for a part of the population actually
served by the wealth management industry: investors recurring to mutual and passive
funds. 6
Mutual funds and other passive funds require low fees compared to other funds, have low
risk and require little effort from their managers in term of time and strategies (personal
interaction with customer is low or absent). They still require a minimum investment and
charge fees starting at 1% of savings.
Compared to a mutual/passive funds, Wealthfront proposed the same passive management
but with some key differences:
Wealthfront

Mutual/Passive funds

No fees for portfolio up to 10 000 $, minimum
investment 500 $

Higher fees on smaller portfolio, much higher minimum
investment

0,25% fees for any portfolios above 10 000 $

Fees always > 1% and discretionary to the size of the
portfolio

Portfolio with a more granular diversification based
on a single customer profile

Investment in a fund which reflects the fund asset
allocation, equal for any customer

As we can see, Wealthfront provide great advantages in terms of costs and diversification,
and thanks to its automation factor is supposed to deliver also greater performance.
To this segment, Wealthfront is able to provide a better service at a lower price.
To summarize, from an income point of view, Wealthfront target customer are:



Individuals with modest savings that could not access any kind of professional
management services
Individuals actually served by passive funds, paying a higher prices for a lower level
of services and fewer choices

From a sociodemographic point of view and with fewer concerns to the income level:



Individuals from generation X (born between 1965 and 1980), likely to be confident
in technology and rather suspicious towards financial institutions.
Millennials (born between 1980 and 2004), “a generation grown-up with technology,
aware of its benefits and, like generation X, waved and affected by multiple financial
crises... This generation has a very different set of expectations about what they
want from an investment service. Millennials want to be able to access services and
view aggregated account data to manage their assets in a convenient and timely

Mutual and passive funds largely invest in obligations replicating performance of a market or index and ETF,
and proposing to any client the same, standard asset allocation. See Annex A

6

19

manner. They grew up with software and expect services to be delivered online.
They don’t have the patience to have to talk to someone to complete their
transactions. They lived through two market crashes and are highly cynical about the
claim that you (or anyone) can outperform the market. They have been nickel-anddimed through a wide variety of services, and they value simple, transparent, lowcost services. There are over 90 million Millennials in the US with an aggregate net
worth of more than $2 trillion; by 2018 that is expected to grow to $7 trillion” 7

4.3 Is the competitive advantage based on innovation? What are the
sources of innovation? What are the factors influencing the pace
of innovation diffusion? Is this a product or process innovation?

Wealthfront is a truly innovative company: it has revolutionized an industry where the
business model has been the same over the last century, enlarged the market to new
horizons, enjoyed an explosive growth and delivered more value at a cheaper price to its
clients. As analyzed in previous sections of this monography, Wealthfront’s artificial
intelligence has been able to provide a rare combination of benefits: an increase in value
(differentiation) and a decrease in price (cost leadership). Indeed, technological innovation
is one of the few drivers able to unlock these two advantages at the same time. The aim of
this section is to understand, via the help of innovation theory, what were the sources of
Wealthfront’s innovation, what has been innovative, how is likely to spread and which
benefits Wealthfront will gain by being a pioneer.

4.3.1 Sources of Innovation

Wealthfront innovation is rather complex both for its financial and technological aspects.
Nevertheless, it is aimed at serving the lower end of the market segment, and even parts of
the population that was not considered a potential target before. Under these premises,
Wealthfront has not been created to improve benefits of the so called Lead users. Its
mission, in fact, is to deliver a premium service to anyone, asking nothing to who has less to
give and charging equally everyone else. It is about providing a tool to increase the wealth
of who most need it and never had the opportunity to do so.
For all these reasons, Wealthfront can be assimilated to a frugal innovation involving a
romantic contradiction: providing an affordable and simple way to manage wealth to people
who need it, deploying an incredibly complex technology.

7

https://blog.wealthfront.com/one-billion-assets-under-management/

20

4.3.2 Process and Product innovation

In Wealthfront strategy innovation has a 360° scope: not only involves the activities typical
to the wealth management industry, being thus a process innovation¸ but revolutionize also
the result of the process, the portfolio, being so a product innovation. This two sides of
Wealthfront strategy perfectly reflect in its strengths: the process innovation consistently
reduce costs, and thus prices, while the product innovation provide a high degree of
differentiation compared to its closest competitors.

4.3.3 The Pace of Diffusion

Wealthfront has enjoyed a tremendous growth, which makes it today the leader in the
robo-advisors space. Founded in 2008 as mutual fund analysis tool, the organization has
started wealth management activities in 2012 and in just one year reached 97 million $ in
asset under management. Across 2013 assets under management grew by 450% and today
Wealthfront manages more than 2.6 billion $.
Different factors are at the base of this brilliant expansion:








It incredibly reduces complexity: investors can create a portfolio and forget it.
Wealthfront optimizes it constantly on their behalf implementing strategy out of the
reach of most of financial actors.
Allows for easy experimentation: asking only 500$ dollars to start investing and
charging no fees, Wealthfront is an affordable experiment for a great numbers of
pioneers and early adopters. The cost of trying is 0, and the portfolio is set up in less
than 10 minutes.
Wealthfront is a substitute not related to any financial institution, a factor that might
has increased the customer propensity to try it. In addition, any Wealthfront account
is guaranteed up to 500 000 $ by the Securities Investor Protection Corporation, a
warranty that helps customers trust a new venture of this kind.
Critical mass and network effect: the application of artificial intelligence to wealth
management industry is subject to the so called network effect. This is due to the
fact the people are generally fearful to let their saving managed by a firm with a little
historical track record. When the number of first users and early adopters reaches a
relevant number, the perception towards the firm will change and the growth
increase at a faster pace. Indeed with its current 2.6 billion $ Wealthfront is now
considered a trustworthy advisor, since its performance have been validate by the
customer appreciation.

21

Million $ Under Management

Wealthfront Growth
3000
2500
2000

Wealthfront

1500

Industry Average

1000
500
0

2012

2013

2014

2015

https://blog.wealthfront.com

4.3.4 First Move Advantage

As shown by the result of the VRIO analysis, Wealthfront’s competitive advantage is difficult
to imitate, but cannot be considered inimitable. This does not mean that its advantage
towards competition is likely to disappear soon: Wealthfront will leverage on different
benefits linked to being the pioneer in this newly born competitive space.








Experience curve: Wealthfront is acquiring and will acquire, thanks to its leadership
position, a greater knowledge of the customers, their needs and the best practices of
the industry.
Scale benefits: Wealthfront is the only robo-advisor able to provide a free of charge
account, and this is likely to further accelerate the experience curve and its
reputation, while increasing its risk-diversification potential.
Reputation: a key factor in the wealth management industry. This point has already
been addressed in the network effects and will consistently increase over time
thanks to variable costs close to zero.
Dynamicity: as addressed in the strategic capabilities analysis, Wealthfront as high
capacity of reaction to change in the competitive landscape. All the capacities
needed to win in this market are already established and due to their nature, they
are also easily reconfigurable.

4.3.5 Incumbent’s Response

All these benefits are reinforced by the fact that, as emerged in the VRIO analysis, the
incumbent’s response related to technological innovation will not be as easy and as fast as it
might be in other industries: artificial intelligence is complex, highly technical, and required
a long time proofing before reach the market. Indeed a product fail will reflect in big loss in
reputation that players in this industry cannot face.

22

Major institutions are developing their portfolio of real options (Charles Schawb, UBS, Credit
Suisse…) but they will take time to reach the market in an effective way and they will still
suffer the bad customer perception towards traditional player.

5 What Are The Opportunities And Threats For Wealthfront?
Can Wealthfront Open A Blue Ocean?
Now that both the internal and the external analysis has been carried out, we can draw
some conclusions, which can be summarized via a SWOT and a Blue Ocean analysis.

5.1 SWOT Analysis

The chosen strategy, the positioning and the context in which the strategy it is deployed
offer to Wealthfront opportunities and threats. These, combined with a summary of its
strengths and weaknesses, will be the content of the last part of this work.

5.2 Blue Ocean Analysis

By comparing the service provided by robo advisors as opposed to established investment
management firms such as Blackrock, Fidelity, J.P. Morgan, etc. we can see that all the
players are able to provide customers with a proven track record of successfully managed
wealth. In addition, once investors have given their assets to asset managers, they don’t
have to worry about them as decisions are taken for them by professionals. This is true for
both established asset managers and robo-advisors.
On the other, robo advisors differentiate their offer as they provide investors with the
ability to have access to information about their investments every time they want. In

23

addition, they charge investors very low fees. This is achievable thanks to the high
technological content of the robo advisors industry, and can allow robo-advisors to pursue a
blue ocean strategy.
Two important elements of the robo advisors offering differentiates these players from
established asset managers in the eyes of customers. Firstly, the level of customization of
the portfolios offered (something not achievable for common investors in established asset
managers, except for high and ultra-high net worth investors). Secondly, the time allocated
for each customers, i.e. robo advisors can provide customers with services 24/7, thanks to
artificial intelligence, whereas traditional investors only have a limited amount of time to
dedicate to each portfolio.
It must be said that established investment managers have a really strong reputation,
developed through decades of success and investments in marketing. On this field, robo
advisors still have a long way to go.

Perceived performance

Strategy canvas
10
8
6
4
2
0

Successfully
manage
wealth

Don't think
about it

Ability to
provide
information
quickly

Low fees

Blue ocean!

Reputation Customization

Time
allocation per
customer

Critical success factor
Established Investment Managers

Robo-Advisors

6 Final considerations
This analysis shows how the asset management industry has historically focused on a niche.
Indeed, up until now, just a tiny part of the population had the opportunity to access
professional asset management services. Wealthfront’s technologically-enabled competitive
advantage has allowed to open a Blue Ocean: by reducing costs and, at the same time,
increasing value, Wealthfront has been able to provide a high level service to a much more
wider market.

7 Bibliography


www.wealthfront.doc

24



https://blog.wealthfront.com



PwC, “Robo advisory vs. human advisory”, 2015



Strategy&, “Global wealth management outlook 2014–15”, 2014



IBM Matching customers with capabilities, IBM Institute for Business Value 2015



www.Bloomberg.com



www.Reuters.com

25

ESCP EUROPE

Monographie –
Wealthfront Inc.
Annexes

Alberto Cresto – Skand Narang
11-1-2015

1 Annexes
1.1 Annex A – Passive (Indexed) Management and Active
Management
The aim of this annex is to provide a brief background of major differences between passive
and active management of a portfolio.
To begin with, we need to make a distinction between mutual funds that are managed and
those that are indexed. The former are actively managed by an individual manager, comanagers, or a team of managers. The index funds are passively managed, which means that
their portfolios mirror the components of a market index. For example, the well-known
Vanguard 500 Index fund is invested in the 500 stocks of Standard & Poor's 500 Index on a
market capitalization basis.

1.1.1 Passive Funds
Index or passive mutual funds are an easily understood, relatively safe approach to investing
in broad segments of the market. They are used by less experienced investors as well as
sophisticated institutional investors with large portfolios. Indexing has been called investing
on autopilot. The metaphor is an appropriate one as managed funds can be viewed as having
a pilot at the controls. When it comes to flying an airplane, both approaches are widely used.
Here is how an index fund works. The money going into an index fund is automatically
invested proportionately into individual stocks or bonds according to the percentage their
market capitalizations represent in the index. For example, if IBM represents 1.7% of the S&P
500 Index, for every $100 invested in the Vanguard 500 Fund, $1.70 goes into IBM stock.
David Swensen, an investment expert, author and former chief investment officer of Yale
University's highly successful endowment fund, makes a strong case for indexing. In his 2005
book, "Unconventional Success", he concludes that because "most individual investors lack
the specialized knowledge necessary to succeed in today's highly competitive investment
markets … passive index funds are most likely to satisfy investor aspirations."
Swensen, and a high percentage of investment professionals, find index investing compelling
for the following reasons:
 Simplicity. Broad-based market index funds make asset allocation and diversification
easy.

 Management quality. The passive nature of indexing eliminates any concerns about
human error or management tenure.
 Low portfolio turnover. Less buying and selling of securities means lower costs and
fewer tax consequences.
 Low operational expenses. Indexing is considerably less expensive than active fund
management.
 Asset bloat. Portfolio size is not a concern with index funds.
 Performance. It is a matter of record that index funds have outperformed the
majority of managed funds over a variety of time periods.

1.1.2 Managed Mutual Funds
Well-run managed funds that have long-term performance records that are above their peer
and category benchmarks are also excellent investing opportunities. There are a number of
top-rated fund managers that consistently deliver exceptional results. Such well-run funds
will register very high on the Fund Investment-Quality Scorecard you are learning about in
these pages.
It is worth remembering that despite their impressive long-term records, even top-rated fund
managers can have bad years. Such an occurrence is little cause to abandon a fund run by a
highly respected manager. Typically, managers will stick to their fundamental strategies and
not be swayed to experiment with tactics geared to improving results over the short term.
This type of posture best serves the long-term interests of fund investors.
In recent years, a number of fund management-related issues have received more public
attention in the financial press than in the past. These fall under the general heading of fund
stewardship and include such issues as a manager's financial stake in a fund, performance
fees and the composition of a fund's board of directors.
While the discussion on these issues is important, there is no universal agreement as to what
constitutes appropriate standards of conduct.
By connecting shareholder and managerial interests, having managers investing significantly
in the funds they manage seems like a good idea. Likewise, compensating managers on the
basis of performance rather than as a percentage of a fund's assets also seems like a good
thing. However, there are reasonable arguments that take an opposite point of view on both
of these issues. Less controversial is the practice of having a majority of independent directors
serve on a fund's board of directors. But here too, there continues to be differences of
opinion. The good news for fund investors is that the debates surrounding these issues
heighten public and regulatory awareness of what constitutes proper mutual fund
stewardship.

http://www.investopedia.com/university/quality-mutual-fund/chp6-fundmgmt/#ixzz3s7RJoAUP

1.2 Annex B - Portfolio Diversification
Diversification is a technique that reduces risk by allocating investments among various
financial instruments, industries and other categories. It aims to maximize return by investing
in different areas that would each react differently to the same event. Most investment
professionals agree that, although it does not guarantee against loss,diversification is the
most important component of reaching long-range financial goals while minimizing risk. Here,
we look at why this is true, and how to accomplish diversification in your portfolio.

1.2.1 Different Types of Risk

Investors confront two main types of risk when investing:
 Undiversifiable - Also known as "systematic" or "market risk," undiversifiable risk is
associated with every company. Causes are things like inflation rates, exchange rates,
political instability, war and interest rates. This type of risk is not specific to a
particular company or industry, and it cannot be eliminated, or reduced, through
diversification; it is just a risk that investors must accept.
 Diversifiable - This risk is also known as "unsystematic risk," and it is specific to a
company, industry, market, economy or country; it can be reduced through
diversification. The most common sources of unsystematic risk are business risk and
financial risk. Thus, the aim is to invest in various assets so that they will not all be
affected the same way by market events.

1.2.2 Why one should diversify
Let's say you have a portfolio of only airline stocks. If it is publicly announced that airline pilots
are going on an indefinite strike, and that all flights are canceled, share prices of airline stocks
will drop. Your portfolio will experience a noticeable drop in value. If, however, you
counterbalanced the airline industry stocks with a couple of railway stocks, only part of your
portfolio would be affected. In fact, there is a good chance that the railway stock prices would
climb, as passengers turn to trains as an alternative form of transportation.
But, you could diversify even further because there are many risks that affect both rail and
air, because each is involved in transportation. An event that reduces any form of travel hurts
both types of companies - statisticians would say that rail and air stocks have a strong
correlation. Therefore, to achieve superior diversification, you would want to diversify across
the board, not only different types of companies but also different types of industries. The
more uncorrelated your stocks are, the better.

It's also important that you diversify among different asset classes. Different assets - such as
bonds and stocks - will not react in the same way to adverse events. A combination of asset
classes will reduce your portfolio's sensitivity to market swings. Generally, the bond and
equity marketsmove in opposite directions, so, if your portfolio is diversified across both
areas, unpleasant movements in one will be offset by positive results in another.
There are additional types of diversification, and many synthetic investment products have
been created to accommodate investors' risk tolerance levels; however, these products can
be very complicated and are not meant to be created by beginner or small investors. For those
who have less investment experience, and do not have the financial backing to enter into
hedging activities, bonds are the most popular way to diversify against the stock market.
Unfortunately, even the best analysis of a company and its financial statements cannot
guarantee that it won't be a losing investment. Diversification won't prevent a loss, but it can
reduce the impact of fraud and bad information on your portfolio.
http://www.investopedia.com/articles/02/111502.asp#ixzz3s7Td86GU


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