Robo advisory firm Wealthfront Inc. said it
would cut the fee on a new investment product that led some clients and
consumer advocates to question its commitment to a low-cost model.
The retreat occurred as Wealthfront and other
startups that pioneered automated investment advice are trying to diversify
their offerings in the face of heightened competition from more established
financial companies. Those rivals are rolling out similar services of their
own.
Since 2015, firms including Vanguard Group
and Charles Schwab Corp.have
launched fully or partly automated investment advisory services that have
surpassed Wealthfront and rival Betterment LLC of New York in assets. More
recently, firms including Morgan Stanley and Wells Fargo & Co. have
introduced or announced plans to develop such services.
Industry analysts said that helps explain why
Wealthfront decided to expand beyond the low-price, exchange-traded funds
created by other firms that it uses to build investment portfolios. As
Wealthfront discovered, though, straying from its roots carries risks.
In March, Wealthfront added a higher-cost
fund of its own. The offering uses derivatives to replicate a popular hedge
fund strategy known as “risk-parity.”
Some clients—joined by consumer advocates and
rivals—quickly took to online forums to criticize the fund’s costs and
complexity. They also took Wealthfront to task for automatically enrolling
certain customers in the fund.
“I just looked at my account & it’s true.
There was money moved into your ‘Risk Parity’ fund without my consent,”
Wealthfront customer Cheryl Ferraro, 57 years old, of San Juan Capistrano,
Calif., recently posted on Twitter.
“I had to go into my account and tell them I
wanted my money moved out of that fund. It shook my confidence in them for
sure,” Ms. Ferraro said in an interview.
Wealthfront on Wednesday announced
it is halving the expense ratio on the risk-parity fund to 0.25%. By
comparison, the firm’s other funds have an average expense ratio of 0.12%.
“The mistake we made is that our pricing was
not at ETF levels,” said Wealthfront CEO Andy Rachleff. He said “the vast
majority of our clients love” the new offering, which has about $500 million in
assets. “Our clients are used to pricing at that level.”
In an email to customers Wednesday, Mr.
Rachleff apologized, saying “It’s clear we could have done a much better job
bringing this service to market.”
Wealthfront, which manages $10.5 billion,
didn’t change the automatic enrollment feature, which affects customers who
elect services that include one aimed at harvesting tax losses. Wealthfront
said it began automatically enrolling those customers in its new products by
default—and requiring them to opt out—after it discovered that many customers
failed to sign up for the tax option.
The risk-parity fund isn’t the first
Wealthfront offering that goes beyond plain-vanilla portfolios. In the past
year, it and Betterment, which manages $13.5 billion, have each introduced
socially responsible investments. Wealthfront and Betterment also have added
so-called smart-beta strategies, which change the weightings of stocks in an
index to seek a higher risk-adjusted return. Wealthfront as well introduced a
line of credit for investors secured by their portfolios.
One aim of these new offerings: Attracting
accounts with larger balances to more quickly accumulate assets and recoup the
estimated $300 to $1,000 cost of securing each new client, says Michael Wong,
an analyst at Morningstar.
Betterment, which has an average account
balance of about $40,000, recently launched a service that allows investors
with balances of $100,000 or more to adjust their portfolios by reducing,
eliminating or overweighting categories of investments, such as small-cap
stocks. Wealthfront, with an average account balance of about $53,000, is
making its risk-parity fund available to clients in taxable accounts with
balances of $100,000 or more.
Morningstar’s Mr. Wong estimates Wealthfront
and Betterment need as much as $40 billion in assets each to generate enough
revenue to cover operating and advertising expenses.
Burton Malkiel, Wealthfront’s chief
investment officer and author of “A Random Walk Down Wall Street: The Time-Tested
Strategy for Successful Investing,” said the firm’s risk-parity fund is
consistent with its history as a champion of index investing.
“We are in no way turning our backs on
passive investing, which I have been an evangelist for all my life,” he said.
Like smart beta, he said, risk parity is a way of investing in index funds but
“making small improvements.”
Wealthfront’s risk-parity fund aims to
deliver higher returns than a diversified portfolio of stocks and bonds but
with the same amount of risk, Mr. Malkiel said. The fund tilts heavily
toward bonds and uses leverage—in the form of derivatives known as total-return
swaps—to get exposure to stocks and real-estate investment trusts. It aims to
keep volatility around 12%, versus about 15% for stocks.
Popularized by hedge fund Bridgewater
Associates LP, the strategy held up better than the stock market in 2008 and
2009.
While a few companies offer risk-parity
mutual funds, Mr. Malkiel said Wealthfront opted to build its own to keep fees
down. “I am comfortable with Wealthfront having a proprietary product
because we have explored all the alternatives and this is the best solution.”
Micah Hauptman, a consumer advocate at the
nonprofit Consumer Federation of America, said he is concerned the risk-parity
fund may not be suitable for all the investors who are defaulted into it.
Because Wealthfront stands to earn 0.25% on
the fund, plus its 0.25% advisory fee, it has an “incentive to recommend” the
fund, said Mr. Hauptman.
Wealthfront said it evaluates each customer’s
portfolio to ensure the risk-parity fund is suitable and that the 0.25% expense
ratio is only slightly more than the cost of operating the fund.
Click here for the original article from The Wall Street
Journal.