Building Self-Driving Money with Wealthfront

Andy Rachleff is the Co-Founder and CEO of Wealthfront, one of the world’s leading investments and personal finance companies.

Building around a core investments offering for young professionals, Wealthfront has added checking, savings and debit functionality plus automation, with the ultimate vision of delivering self-driving money, where personal finance is fully automated by software.

Today, Wealthfront is announcing the launch of checking account features in a significant extension of its existing offering.

Prior to founding Wealthfront, Andy co-founded Benchmark, one of the most respected venture capital firms on the planet.

Full transcript:

Will Beeson:

Andy Rachleff, welcome to Rebank.

Andy Rachleff:

Thank you for having me.

Will Beeson:

It's such a pleasure to connect. I've been looking forward to this conversation. You guys at Wealthfront are one of the absolute leaders in the digital investments space, one of the early players, and also one of the most successful. I think what we're going to be discussing today will be not only an interesting new product launch, but hopefully a bit of a context for what that means about the future of Wealthfront. So maybe just to kick off, could you quickly introduce yourself and tell us a bit about Wealthfront?

Andy Rachleff:

Sure. My name is Andy Rachleff. I was a career venture capitalist before I became an accidental entrepreneur. I was 25 years in the venture business, the last 10 of which was a firm I co-founded called Benchmark Capital. I retired to give back. And one of the things that I was doing was teaching at Stanford Graduate School of Business. When this idea came to me as part of something else I do, which is serve as a trustee at University of Pennsylvania and chair their endowment investment board. So today, Wealthfront's a next-gen banking service that helps young professionals optimize their savings. We provide no-account-fee banking and low cost investment management, all through the highest rated financial app in the Apple App store.

Will Beeson:

Wow, well, amazing backstory, amazing pedigree. And I would highly encourage everyone who doesn't know the story in detail already to go check out some of the other great conversations or content on Wealthfront, because it's fascinating. But today I wanted to look forward. I understand that you guys are launching, have launched potentially by the time we push this, an interesting new product, which I'd love for you to tell us about.

Andy Rachleff:

Sure. Well, a little over a year ago, we launched our high yield cash account and the response to it was beyond our wildest dreams in terms of the amount of assets that we were able to collect. So we thought that it would make sense in order to combine the best features of a savings account, which is what we had with the best features of the checking account. So this past week or last week, we just introduced a bunch of checking features to add to our high yield cash account. So specifically, you can now direct deposit your paycheck and get paid early, believe it or not up to two days earlier than you would normally in your regular bank. You can bills and your friends from the account and you can make purchases and take out cash versus our combo debit and ATM card. So basically we're offering a hybrid of a checking and a savings account that earns you interest on all your cash and we get you your paycheck two days early.

Will Beeson:

All right. So I can understand why that fits naturally within the product suite that you guys offer. Real quick, maybe just pick up on that high yield savings account. So I think I remember when you launched that, must have been last year, and I think I remember reading some headlines about how maybe in the first month or so you raised something like a billion dollars in deposits, which is a phenomenal figure. And I imagine that it's continued to grow since then. Can you talk about that cash product and why that was so interesting to your users at the time?

Andy Rachleff:

Well, it was really simple to understand. We offered a much higher interest rate than everybody else. We offered higher FDIC insurance, a traditional savings account offers a quarter of a million dollars of insurance. We offered a million dollars of insurance and we offered unlimited withdrawals, whereas, the traditional savings account only offers up to six withdrawals in any one month. So it was a better product than what you would find in a traditional bank. And now we're unique in that we've taken all of those great features and added checking feature. So you can get paid on all of your money. Unfortunately, people keep separate checking and savings accounts. There's no reason to do that, other than you don't want to have a bunch of money laying around on which you don't earn any interest.

Will Beeson:

Yeah. So now the launch of the checking account makes perfect sense. Can you talk a little bit about the demographic of your user base and how the design of this specific checking account was informed by that group?

Andy Rachleff:

Sure. Well, we're focused on young professionals. We like to call them, millennials who save. The traditional narrative about millennials is they're all out of work smoking weed, living in their parents' basements. And that's just not true. Like every other market there's an 80/20, 20% of the 90 million millennials out there are doing exceptionally well. And we're trying to build a complete suite of services to help those millennials who save, manage their savings for the short and the long term. Deloitte has done some market research that has shown that in 10 years, millennials as a whole will have about $12 trillion of assets. And we think that the millennials who save will have over 80% of that traditional market, 20% of the people have 80% of the assets. So if we can do a really good job serving them where everything is automated, you don't need to talk to any bankers, you don't need to go into a branch, there aren't any fees that would cause you to be frustrated with your bank, then we think we're going to earn a disproportionate share of those assets.

Will Beeson:

Do you expect the checking account to attract new customers to Wealthfront or is this going to be an enhancement, a deepening of a relationship with your existing user base?

Andy Rachleff:

I drive my son crazy when I answer that question by saying, "Yes," it's both. It's absolutely both. And by the way, it's not a checking account because technically we're not a bank, but what we can do is we can offer the best of checking features and savings features in what we call a cash account.

Will Beeson:

Got you. Is that different than what others in the market, whether it's a Robinhood, or a Betterment or even a Chime in partnering with a sponsor bank has offered, or have you guys followed that same structure?

Andy Rachleff:

No, because they're separate. They're offering separate checking and savings accounts, which means that you have the inconvenience of having to move money back and forth between those two accounts. So we get rid of that problem, where you can just put all your money in one account and you can spend from that account, knowing full well that you're earning money on all of that money. And then the other thing that will really leapfrog past everyone else beyond the advantages that we have today is when we start rolling out what we call our self-driving money features. So this year we will deliver the capability for you to direct deposit your paycheck with us, we'll automatically pay your bills and then we'll route the remaining money to the most appropriate place, depending on your situation and goals.

Andy Rachleff:

So if you're saving to buy a home, that money should be in something highly liquid that has no market risk. If you're looking to save for your kid's college, then that go into a tax advantage college savings plan known as a 529 account. We would route that money there. If you're saving for retirement or just to grow your net worth, we would put that probably either in an IRA or a taxable investment account. But imagine, when your life goes on autopilot and you don't have to think about any of these things, the money's just automatically routed to the most appropriate place.

Will Beeson:

All right. So this is this panacea of personal finance, which we've all been dreaming about for years, if not longer and you're delivering it. So how long has this been a work in progress?

Andy Rachleff:

Well, we've been building toward it. A couple of years ago, I started talking about our vision of optimizing and automating all of your finances. One of our engineers coined the term self-driving money as a much pithier way of saying that. In order to deliver on that vision, we've had to make a multiyear investment in a banking and brokerage automation system. So we've had a bunch of engineers working for over four years on that. And then we've had a bunch of engineers working on an advice automation engine. We first introduced it about three years ago and we're building on that.

Andy Rachleff:

So our typical client, our average client links over three of their financial accounts to us. So they might electronically link your existing bank account or brokerage account, if they own a home, their mortgage, we get all of their credit card receipts. And by taking in all of this data with their permission, and by the way, never selling that to anyone else, we're able to learn about the habits of our clients in a way that no financial services provider can. And we can take that information and customize a program that's ideal for you.

Will Beeson:

All right, so this is great. This is not, "Hey, you used to use this for investments, now we also offer something that you would recognize as a checking account, and you should do that too." This is almost an extension in a way, it's a new service, deeply integrated with the core foundation of what Wealthfront offers to extend the value to your existing customer base and any new signups. Is that a fair characterization?

Andy Rachleff:

That's an absolutely fair characterization that has been years in the making. We're a technology company. We're a technology company that does finance, not a finance company that does technology. Over half of our employees are engineers. We succeed by delighting our clients through product. Other fintech companies attempt to succeed through marketing expertise. In our case, we market through word of mouth. If we can really delight our customers, then we believe that's the greatest form of vitality.

Will Beeson:

Can you just describe for me what in your mind the mission of Wealthfront is, and to what extent if any, that's evolved over time?

Andy Rachleff:

Well, we've actually just broadened it. When we started…

Will Beeson:

Timely question.

Andy Rachleff:

It was a very timely question. I'm glad you asked that. So when we started our mission was to democratize access to sophisticated financial advice. We started that about eight and a half years ago. Well, in the last eight and a half years, we've revolutionized the investment world, we've made it possible for just about anyone to access as sophisticated, an investment methodology as the premier university endowments employee. And we do this for a minimum of $500 and a fee of only a quarter of a percent per year.

Andy Rachleff:

The world reacted by copying us, which is the greatest form of flattery. So just about every investment firm has a less featured and less capable version of what we first introduced eight and a half years ago and supposedly by next year, there's going to be a trillion dollars of assets in automated investment platforms. So we feel like we've made really great progress against our original mission. And as we broadened our products to include other financial services, like traditional banking products that we need to broaden our mission. So we've recently decided to broaden that mission to build a financial system that favors people, not institutions.

Will Beeson:

I like it.

Andy Rachleff:

So what we mean by that is we want to deliver a very broad suite of financial services that are in the best interest of the client, not in the best interest of companies like ours. Now, as Amazon has proven, if you build great products for people, you can do just fine sharing much of the economics with your customer. And I love the double entendre of the mission statement because we're building our own financial system that favors people, not institutions. And if we succeed at what we're doing, we think just like in the investment world, we're going to be emulated and maybe we can actually impact the entire financial system.

Will Beeson:

Yep. All right. So if I play devil's advocate for a minute, just to have a little bit of fun there, there are people out there who say, "Okay, the roboadvisor concept...," and I appreciate that we've moved on from there, but basically “the idea of offering professional quality, investment management services on a democratized basis at an extremely low cost, which those who have any background or training in investments generally believe delivers the best longterm results makes a lot of sense. It didn't have the disruptive effect on the retail investments industry, perhaps that people expected, and actually people are signing up in droves for Robinhood.” What do you say to that? Is the holistic democratize financial management the right approach, or do people just want something that's fun and sexy?

Andy Rachleff:

Well, it's all depends on how you define these things. If you define it by assets, we have a huge multiple of the assets that Robinhood has. They have more clients who are gambling in a casino. So on a dollar basis, which is the way that the investment industry measures things, we've had an enormous impact. If we've created an entirely new segment with a trillion dollars of assets, that's unbelievable. And as a matter of fact, disruptions of the sort that Clay Christensen defined, and he's the person who coined the term, the Harvard Business School professor who sadly passed away last year, he says that, "True disruptions take longer than other kinds of initiatives."

Andy Rachleff:

And what you find is that we have been adopted at a faster rate than ETFs and ETFs were adopted at a faster rate than index funds, which were adopted at a faster rate than mutual funds. So if you actually go back and plot these things, we've been adopted at a really fast rate. Robinhood just took something that was existing and made it free. I think that they did a great service for do it yourselfers. We served delegators.

Will Beeson:

Different question, but similar vein in that it's, again, related to competition, we've seen amazing consolidation in the past 12 months or less in the kind of discount brokerage space, first, it was a move from the traditional AUM based charging structures to a subscription model, which even as recently as maybe a couple of years ago, would've seemed unlikely or impossible for the industry to adopt. Now we've seen large scale consolidation and free or extremely low cost offerings from a lot of incumbents. How does Wealthfront position itself going forward vis-a-vis the Schwabs of the world who are now offering extremely cheap services to customers?

Andy Rachleff:

Well, their robo-advisor is free and they've attracted $40 billion of assets, but only 4 billion from new clients. Just because it's free, doesn't make it good. Not all software is created equal. We're really good at building products. We've attracted a huge multiple of that amount of assets into our investment service and we did that by building better products, delightful products. Financial services companies are not very good at software. So they buy other companies in order to reduce their costs, to make more money.

Andy Rachleff:

We build new products to make more money. JPMorgan Chase, we think our real competition are the big four banks, people like Chase, and BofA, and Wells Fargo and Citibank because that's where most of the money is today. And they're not very good at building products. As a matter of fact, Chase tried to build a personal finance tool called Finn that was an unmitigated disaster that they ultimately had to write off. They all know they're not very good at it and what's recently happened with the pandemic has only exacerbated this problem. I tried to close an account at Wells Fargo a couple of weeks ago and when I called, which was by the way, the only way that I could do it, I was told that there was a three hour wait time.

Andy Rachleff:

In our case, our customer service reps, who we call product specialists, we handle on the order of 35,000 clients. The only way that they can do that is if they're almost never used. And so our load didn't go up at all during the pandemic. It's because of our great products.

Will Beeson:

Yep. All right. So back to self-driving money point, because it's just obviously where the industry seems like it's going, and the fact that you guys are launching this now feels like you're significantly ahead of a number of your peers in the space. Do you have that feeling?

Andy Rachleff:

Yeah. Because in order to deliver self-driving money, you had to have made a very large investment in automating the brokerage and banking infrastructure number one, and number two, you had to invest in advice automation. Well, there's only one other company we know of that is invested in automating the banking and brokerage infrastructure, basically building something from scratch and that's Robinhood. So we and Robinhood are the only two that have done that, but we're the only company that has automated advice. And the whole idea of linking up all of your accounts and ingesting that data and drawing inferences upon that data to be able to deliver that advice, no one has done that. And you can't just replicate that overnight. So this has been in development for a long, long time.

Will Beeson:

Well, I love the concept, love the offering. It's a genuine service to the vast majority of Americans and I look forward to watching you guys scale it.

Andy Rachleff:

Well, actually it could be to the vast majority of Americans, but it's probably of greatest interest to people who actually have saved some money because routing your money into the most appropriate place isn't of much value if you're living paycheck to paycheck. So you mentioned Chime before, we think Chime does a really good job for people who are unbanked or living paycheck to paycheck because they don't have a single account that pays you high interest and gives you the checking features. But if you want something simple to get going with, they're just fine. But if you want to be able to take maximum advantage of the money you saved, then we're second to none.

Will Beeson:

Yeah. So because of the demographic that you guys serve and the vast number of customers that you have, I'm sure you have interesting insight into the way that people have been responding since the covert crisis arose in the US kind of March time, and the way that millennials are thinking about money and finances looking forward. Is there anything you could share along those lines?

Andy Rachleff:

Yeah. They're actually doing a hell of a lot better than you would think. So our clients, the unemployment rate among our clients is only on the order of 3%, which is much lower than the national average and their savings rate, which was 15% has gone up over 2X.

Will Beeson:

What do you make of some of the, I don't know that they feel to me a bit dated now, and perhaps they're a bit simplistic to begin with, but all these articles and thought pieces about how actually the millennial generation was completely different than any other generation that's ever come before it, they don't want to own homes, they don't want to own anything, they don't want to work continuously in the same profession or for the same company for a long period of time. It is that true based on your guys' experience or would you challenge some of that?

Andy Rachleff:

Look, these are gross generalizations, but I can tell you that there's definitely a greater preference for experiences than assets than older generations. So they don't need to own a home, they might prefer to use that money to travel around the world. Unfortunately, we can't do that right now, but in order to address that in our automated advice, we actually tell you how much time you could afford to take off and still be able to meet all your financial goals. So that's an example of a feature that's designed specifically for our target audience.

Will Beeson:

Yep. It sounds like you're squarely focused on the millennial audience, the millennial customer. Have you spent much time looking at, or thinking about younger generations, Gen Z and how they may be engaging with fintech or investments or financial services?

Andy Rachleff:

Not really because they don't have any money yet. And our business model is focused on making money on that money. So we earn a small spread on the cash that you keep deposited with us, despite paying a really high interest rate, we make an advisory fee on the investment accounts. It's a tiny fraction of what other people charge. So we take advantage of our automation to lower our cost and share the economics with our clients. But our business model is based on assets, not number of people or advertising.

Andy Rachleff:

So very young people really aren't appropriate, number one. Number two, when you're very young, you haven't yet learned the lesson that the academic research has clearly proven time and time again, which is it's almost impossible to outperform the market by investing in yourselves. So Robinhood is really popular with very young people because they have yet to learn that it's a really dumb idea to trade stocks. So we let them go off and use less featured banking services and trading services so that they can come to their senses and realize that we can do a much better job for them.

Will Beeson:

So because of the COVID crisis and the expected, I guess this may be more than expected, I think it's actually a declared a recession by now, we've seen different companies, different startups, I suppose, for lack of better word, not that Wealthfront is much of a startup anymore, but different companies take different approaches to fundraising, to layoffs, to cost management. How has the economic environment impacted the way that you're running Wealthfront and any fundraising that you're planning?

Andy Rachleff:

I think the biggest change is that it's focused us more on cashflow than growth. So we're willing to grow more slowly in order to use less cash. So we've made a number of changes back in early March, without any layoffs, to significantly lower our cost base.

Will Beeson:

And with your former venture capitalist hat on, as you look around the market, are there other players, noteworthy players that are doing the right things, doing the wrong things? What impact do you expect this economic climate to have on the broader fintech space over the next few years?

Andy Rachleff:

I'm so busy running Wealthfront that I really don't have much time to look around. I sat in on the Benchmark annual meeting a couple of days ago, and they were telling stories about how their portfolio companies have taken swift action in order to do the same to reorient toward cashflow in a way perhaps in the short term, from growth. So I think the good companies are all oriented that way. I think that a younger entrepreneur might find that harder to do because they get addicted to the growth. The faster you grow, the more money you burn. And historically the companies that earn the highest valuations are the ones that grow the fastest. So that's a hard habit to break for some younger, less experienced entrepreneurs. But generally speaking, I think the good companies have all made that change.

Will Beeson:

You talked about the big four US banks as your main competition, as you see it...

Andy Rachleff:

That's where all the money is! Millennials haven't invested their money by large. It's just sitting idly in the big four banks, primarily not earning any money.

Will Beeson:

Do you expect banks to use the recession as an opportunity to accelerate digital within their businesses and potentially close more bank branches in an effort to shore up their strategic positions? Or do you view incumbent banks as in any way being structurally challenged going forward?

Andy Rachleff:

To a bank, a branch is a strength, it's a true asset and they try to leverage that asset. You can't just suddenly close down your branches when the vast majority of your customers and more importantly, the vast majority of your assets are tied to people who like the branches.

Andy Rachleff:

Now, it just so happens that millennials prefer everything to be done electronically via their phone, our clients tell us, "We pay you not to talk to us." So branches are not of much value to, we believe not of much value to millennial customers. As a matter of fact, it costs the bank, something on the order of $200 per client to maintain.

Andy Rachleff:

So how do they get that $200? Well, it's by giving you less interest on your balance and by charging you more fees. When the Fed first started cutting rates this summer, Jamie Dimon, the CEO of JPMorgan Chase was interviewed by Bloomberg and asked, "What are you going to do if the Fed continues to cut rates?" And without missing a beat, he said, "Raise fees." It's not going to be through cutting branches. That's what they did during the Great Recession. As a matter of fact, banks used to pay higher interest rates on their checking accounts, and they lowered them to zero during the financial crisis.

Andy Rachleff:

And what they realized was it didn't affect their funds flow. So when interest rates went up, they kept it all for themselves and they still paid zero interest rate to their checking customers. So banks face, what's known as an innovator's dilemma, another term coined by Clay Christensen, that if they ignore disruptors like us, it's actually more economic to them, they don't lose as much money, but if they go after us, they're going to lose a ton of money. And if they ignore us, we're going to chip away at their growth opportunity, the young people. So they're damned if they do and they damned if they don't. That's the innovator's dilemma.

Will Beeson:

Well, you know what, it sounds like they're in an even worse spot now with you guys launching this new product and delivering this self-driving money vision, this I think is very, very powerful and I look forward to watching it evolve.

Andy Rachleff:

Well, thank you Will, I really appreciate you hosting me.

Will Beeson:

Andy Rachleff, thank you very much for joining us today.

Andy Rachleff:

My pleasure.