Will Your Robo-Advisor Stay The Course? UBS Buys Wealthfront

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Over time, more and more people are seeing the benefits of investing in stocks and bonds through low-cost index funds. Here is a chart from Morningstar showing the overall flow of assets out of actively-managed and into passively-managed US equity funds over the last 15 years.

For a while, people wondered if low-cost digital advisors that managed a portfolio of index funds for a modest fee would take over. The picture looks a little different today.

Wealthfront was one of the early digital-only startups, promising to manage a diversified portfolio of low-cost ETFs for you for a modest 0.25% of assets, even if you had as little as $500 to invest. They tried a few different things over the years, including changing up their model portfolios, trying to add a in-house risk-parity fund, and even recently adding crypto and individual stock options. Their final move came this week, when they announced they would be sold to UBS for $1.4 billion. This wasn’t exactly a huge exit, given the huge amount of venture capital they had burned through over the years. As usual with such acquisitions, they promise both “nothing will change” and “things will only get better”.

In hindsight, I am relieved that I didn’t let Wealthfront handle my assets. They clearly had no firm guiding principles, tweaking their portfolios with each new trend. Based on the reporting, it looks like they sold their customers to the highest bidder, as UBS is not exactly known for low-cost passive investing. This play is widely seen a way for UBS to obtain young investors that will one day be rich (read: one day will generate lots of wealth management fees). See UBS Buys Wealthfront for $1.4 Billion to Reach Rich Young Americans and Why a Bank for the Super Rich Is Taking Aim at the Younger Merely Rich.

Is this move what is best for Wealthfront’s customers? Or what was best for Wealthfront’s investors? Mark the date. I will be checking to see what Wealthfront clients own in 5 and 10 years, if that is still possible. Keep in mind that any portfolio changes usually result in taxable events.

Funds flowed into index funds for a simple reason: they performed better and made folks more money. Index funds performed better primarily due to low costs and low turnover (low tax costs). However, it doesn’t appear that Wealthfront could operate successfully independently while offering low costs. One way or another, the new owners are going to try and extract more money per client either via portfolio changes or higher fee products.

Unfortunately, I worry that even Vanguard, in its pursuit of growth, is gradually going down the same path as many large nonprofits. Many “nonprofits” are huge bureaucracies that chase money as eagerly as any corporation – more money means bigger salaries to management, more political power, and greater career advancement. (Side note: I thought that Vanguard got away with their huge Target Date fund capital gains distribution with little media attention, but now see: Massachusetts investigating sales of target date funds to retail investors after word of surprise tax bills.)

I don’t write much about robo-advisors any more. They showed promise initially, but apparently the business model just isn’t working.

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Comments

  1. How much longer before Betterment goes under or gets bought out?

  2. What are your latest thoughts about M1? I believe you had tried them out?

    • I love M1, and although they are included with the robo list, I really look at it as intelligent portfolio investing. You can set up “pies” of ETFs and stocks that you want to invest in… And as you deposit more money, it invests smartly to balance your portfolio to your target range instead of automatically rebalancing and creating a taxable event. (You can always rebalance manually if you want).

      There are some downsides… It’s difficult to rearrange pies, sometimes the backdating performance data is off when there are changes to the underlying portfolio, they limit certain stocks and ETFs based on liquidity, and they use APEX Clearing as their clearinghouse. But, there is nothing that I can find that works as good for long term investing.

  3. Robo-advisors can succeed but they’re not going to generate the returns venture capital expects because the whole point is cost saving via passive investments. There’s not a major growth opportunity as their operating income only scales so much with AUM.

    There’s no guessing required, this was only a good move for Wealthfront’s investors and an iffy move for UBS. I don’t know how many folks will stick around with them once they start ruining the product, which is all but inevitable. ACAT’ing out isn’t expensive and many will find its easy to do what the Robo-advisors were doing themselves w/ a spreadsheet and a 1 to 5 fund portfolio. The first low cost brokerage that automates this will essentially be the robo-advisor that we need and will survive.

    I believe Betterment is the only major player with the smaller M1 on the side. WiseBanyan was sold to the metastatic Axos bank, infected, and will soon die a quiet death.

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