Wealthfront diversifies into stock selling

BI Intelligence

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As competition in the US robo-advisor market intensifies, startups must find new ways to attract the volumes of assets under management they need to ensure their success.

One such robo-advisor, Wealthfront, hopes to achieve this with a new service, called Selling Plan, that will let listed company employees sell their company stock more cheaply, it announced in a blog post on Wednesday.

Selling Plan was initially launched as a prototype for Twitter employees, but it's now available to employees of 11 firms, mostly tech companies, which commonly offer stock options as benefits. Wealthfront claims it has so far received interest from employees at another 300 or so companies.

The service aims to replace more expensive third-party brokers. Selling Plan helps users create a tailored plan for the sale of their shares, and allows the user to either reinvest what they earn from the sales in a diversified portfolio run by Wealthfront, or set the money aside. Usually, the only option for the average employee who wants to sell their shares is to create a plan manually and then pay brokers engaged by their firm high commission fees to facilitate the sales.

Stock selling services are available from legacy wealth managers, but they're typically only used by high-level executives who own a lot of shares, as smaller volumes are unprofitable for these wealth managers to handle. Wealthfront claims its service will be cheaper than using an employer's brokers because it is run by algorithm and charges no commission.

Though it targets a lucrative market, Selling Plan seems to have some significant shortcomings. According to Wealthfront, employees who are priced out of selling their shares make up a $200 billion market, which means the service could result in a powerful revenue boost if it sees wide adoption. However, potential users would have to move their shares from their account with their current broker to a new account with Wealthfront. And given the complexity and meticulousness of US securities bureaucracy, this may take weeks. Moreover, Wealthfront will charge fees on any proceeds that are reinvested into one of its portfolios, and uptake of the service will likely depend in part on how much these fees amount to.

Robo advisors are threatening to upend the enormous global wealth management industry in several ways, and they are likely to arrive in full force within the next few years.

Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on robo advising that looks at the market for robo advisory services, the drivers behind consumer adoption of robo advising, why the robo advisor market presents an opportunity to traditional wealth management firms, and how startup robo advisors can succeed as massive legacy companies begin offering their own services.

Here are some of the key takeaways from the report:

• Large incumbent wealth managers won't lose out to startups like Betterment and Wealthfront. Instead, they are embracing the technology and launching their own products, which are scaling quickly. 
• Consumers across all asset classes are receptive to robo advisors — including the wealthy. 49% of this group would consider investing some of their assets using a robo advisor.
• The majority of assets managed by robo advisors will come from people who already have some investments. We estimate that the volume of assets that comes from people who don't currently invest will be less than 1% of the total by 2020. 
• Startups are going to find it difficult to scale, and will need to differentiate their products to succeed. They are already doing this by providing white label services to wealth managers, and more customized stand alone solutions. 

 In full, the report:

• Provides a forecast for the volume of assets robo advisors will manage by 2020.
• Highlights the factors that will drive the growth of robo advisors
• Explains the different types of robo advisor business model.
• Details the outlook for incumbents and startup robo advisors in the wealth management industry.

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