08/11/2014: Wealthfront - an online financial services start-up targeted squarely and unashamedly at Millennial wallets - raised $64 million last month. That's on top of $35 million that venture firms plowed into the company earlier this year.
Every sweeping cliché about Millennials - that they are addicted to the itch and twitch of immediate gratification, that they are not interested in participating in the casino stock market - is being sent to the generalization graveyard. Not just because of the success of Wealthfront - who has crossed $1 billion in assets under management - but also the growth of Betterment, LoanVest and others who have a hungering eye on the $7 trillion in liquid assets that Millennials will have in their generational clutches within the next five years.
What's particularly revelatory about the success of Wealthfront - they reached one billion in two-and half years, while it took Chuck Schwab six years to get there - is its canny use of technology and whizzy algorithms, the deities of the Millennial, in the service of a rather boring, long-term, Ben Frankliny investment conservatism. This is more often associated with people who need hip replacements than hipsters.
Wealthfront works by first asking a few basic questions - age, income, liquid assets, risk tolerance. It's the bromidic stuff of financial planning for decades. Then it provides a financial plan consisting of ETFs - most of them from Vanguard - that track underlying indices in a variety of asset classes, trades based on what the algorithm instructs. The boil down their practice to: personalize, diversify, re-balance.
It's not surprising that Millennials are willing to put their financial faith in the crunch of algorithmic investing (or as its called, robo-investing from robo-advisors. After all, this is a generation of digital natives and semi-natives who trust code jockeys to find the cheapest plane ticket, recommended the best oxtail pizza, and soon, to provide driverless cars. They will also be the early adopters of Apple Pay and other new transaction modes.
Their faith in technology is understandable. Algorithms don't act in their own self-interest. Algorithms weren't responsible for dreaming up sub-prime loans and nearly bringing down the financial system. Millennials didn't trust authority and conventional sources of wisdom before the melt-down. Imagine now. Wealthpoint argues that Millennials: "...have been nickel-and-dimed through a wide variety of services, and they value simple, transparent, low-cost services.
The Pew Study "Millennials in Adulthood" confirms the Wealthfront thesis finding that "... just 19% of Millennials say most people can be trusted, compared with 31% of Gen Xers, 37% of Silents and 40% of Boomers." If you can't trust people in general - which was the question - what hope is there for the conniving financial advisor?
The technology lure of Wealthfront is unsurprising, but what is remarkable is that Millennials are so drawn to the core Wealthfront investment thesis, which argues against individual stock picking, and balances a personalized mix of actively managed ETFs instead. As they put it, "...our service is premised on the consistent and overwhelming research that proves index funds significantly outperform an actively managed portfolio."
I love that a generation who's identified with the eroticism of immediacy is choosing slow and steady as an investment theme. It makes them, truly, the Ben Franklin generation, in even more ways than just how they relate to money; they value craft, authenticity, strong values. Ironically, they are far more prudent and sensible than their predecessors. After all, both Boomers and, yes, the Greatest Generation fell victim to get-rich-quick bubbles, blandishments, and stock-picking mania. Not many people reading this remember or know that the stock market euphoria of the sixties was monikerized as "the Go-Go Years."
Millennial attitudes are understandable, to say the least; they are struggling under the crippling weight of student loans, they've seen their parents and often grandparents suffer the pain of the financial crisis, so to the extent they want to enter the stock market at all, they want to do it with commanding caution. As one commentator, noted, they "share experiences that color how they look at their finances and the financial industry"
Yet despite their personal debt and experiential context, Millennials are surprising long-term optimists, which explains their willingness to park their money in tracking ETFs. On this subject, Pew notes: " Millennials are the nation's most stubborn economic optimists. More than eight-in-ten say they either currently have enough money to lead the lives they want (32%) or expect to in the future (53%)."
Needless to say, skeptics are in full swarm mode, most from the traditional advisory world. They argue that nothing can replace a human being - supported by the right technology tools. And that Wealthfront's business model - a monumentally minimal .25 percent (on assets over $10,000) - does not a business make. I'm confident, though, that the folks at Spark, who led the $65MM round, can do basic Common Core multiplication.
It will, in fact, be possible for Wealthfront to move up to more expensive, value-added services if it so chooses, because they are proceeding from a place of generational trust. It will be harder for traditional financial institutions to come down and meet them from the top of the mountain.
An America led by the Ben Franklin generation is likely to be a more stable, patient, values-driven and realistic place than the one led by the boomers. It's a place where technology is expected to solve problems, simplify life, and strip inauthenticity out of the sales process. They don't want to beat the system; the success of Wealthfront and others says that the Ben Franklins want a fair system they can be part of, and that can benefit everyone in it.
For traditional financial institutions - who for decades have sold themselves on outperforming the system - this is decidedly not good news. The regulatory language "Past performance is no guarantee of future results" was created because banks, mutual fund companies, and others would manipulatively scream "Up 75 percent" and investors would see that as a go-forward promise.
I'm not saying that Wealthfront or Betterment will become tomorrow's JP Mogan Chase or Fidelity. The market is dynamic; already Schwab is getting into their space, and others will follow. But the impact of the Millennials on the fundamental sales structure, value equation and content (in its broadest form) delivery of financial services is yet to be written. There is no doubt of that.
While it is true that most financial behemoths make their big money from the corporate side, I think even that world - which is very much driven by advisory services and complex financial products - is vulnerable to the upside-down view of the Ben Franklin generation. Even so, the quirky but intellectually consistent confluence of Ben Franklin values and Larry Page technology will come to disrupt the embedded architecture of corporate finance. Not all of it can be dismantled, but I can see opportunities for disruption in areas like debt syndication.
So when the SEC finally gets its act together on the JOBS Act, and promulgates the details of equity crowd-funding for non-qualified investors, that will be just the beginning of what I think will be an inevitable cascade of change. Things happen slowly till they happen fast. It was back in 1998, believe it or not, when Spring Street Brewing was brought public by Wit Capital in the first Internet IPO. The giants of financial service haven't seen the telluric shifts that travel, media, entertainment and home thermostats have. They will. Depending on who you are, the Ben Franklin generation is composed of 80 million Benedict Arnolds.
I have not, or do not, consulted for any of the companies referenced in this piece, and have no equity position in them.