Ironic is the only word to describe Wealthfront`s fate
A look at Wealthfront`s integrity & UBS`s fresh strategy
Whether it was ditching, scarping, or terminating the agreement to acquire Wealthfront, UBS surprised the market. There is more happening than what meets the eye. It can’t simply be a matter of backing off because private valuations have dropped and paying 20+ times revenues seems way too much in retrospect.
Robo deals since 2019
The $1.4 Billion deal value was agreed in January 2022 based on 2021 annual revenues of roughly $67 million, AUM and clients $27 Billion and 470,000 US clients. UBS and the market were well aware at the time that Schwab paid roughly 4.3 times for TD Ameritrade’s revenue and Morgan Stanley paid 4.6 times for E-Trade’s revenue.
- Announced in 2019 and closed in mid 2020 — Schwab acquisition of TD Ameritrade all in stock deal of $26 billion
- Announced in early 2020 and closed in Fall 2020 — Morgan Stanley acquisition of ETrade $13B
Let alone that through these deals, the acquirers were buying growing and profitable businesses (albeit of declining margins).
Personal Capital, the other digital standalone robo that was acquired by Empower Retirement in 2020, should have been a benchmark for the Wealthfront pricing. The deal was announced in mid-2020 when Personal Capital had $12.3B AUM, c. 25,000 investment clients, and 2.5 million total users. The agreement was $1 Billion with $825 million upon closing and $175 million contingent on agreed growth metrics. The estimated revenues at the time were c. $75-$100 million which equates to a pricing of roughly 10 times revenues. Keep in mind that Personal Capital was in no distress to sell at the time.
Details of the Wealthfront deal and their business
Actually, the headlines quoting $1.4B for the Wealthfront deal, cover up the fact that cash agreed upon closing was close to $700 million! This makes the deal look more reasonable and much closer to the Personal Capital deal of c. 10 times revenues. The remaining balloon payments (according to RIAbiz) were contingent on meeting certain performance metrics.
So, why did UBS take this decision?
Didn’t they know already that Wealthfront`s investment business was not growing at any reasonable rate? Their AUM was around $20 billion in 2019 and now $27 billion, whilst Schwab Intelligent Portfolios amassed $65B by the end of 2021. Leapfrogging from incumbents that started by offering free services and then figured out how to add digital planning at low cost, was already successful.
Was UBS buying the purest digital robo to target the younger generation?
Wealthfront had already pivoted in 2020 towards banking services starting with their Cash account offering via Green Dot. It was the only way to grow their business and ironically, they deployed the traditional tactics of new banking entrants (not something UBS could count on).
`the Wealthfront Cash Account offers 5x more interest than the national average, unlimited and easy transfers to a Wealthfront Investment Account and up to $1 million of FDIC insurance offered through Wealthfront’s partner banks.`
But even after this pivot, the number of users didn’t grow at an impressive rate (from c. 400,000 to 470,000 today).
Ironically, Wealthfront the hard-core Self-driving Money leader, tainted its integrity in several ways. One of their worst moves which is not even well publicized was the launch of an in-house investment vehicle which is an oxymoron to their low-cost self-driving principles of investing.
In early 2018, Wealthfront announced the launch of its first fund. The Wealthfront Risk Parity Fund is based on factor analysis and the quantitative calculations of hedge fund manager Ray Dalio. The fund WFRPX has amassed $1.3 billion in assets despite a dismal performance.
A glance at the current Fund holdings of WFRPX from yahoo.com shows the violation of cultural integrity to Fintech, let alone to the leader of Self-driving money. Is this Greek to most investors or what?
Is UBS Wealthfront`s counterparty for the total return swaps Wealthfront needed behind the scenes for their fund (c. 2% swap fees§)?
Was UBS looking to use WealthFront`s Direct Indexing capabilities to automate the personalization of investment accounts at scale? Did they back off that bet because the current macro environment has put breaks on the ESG trend which was the main force behind the investments of big players in Direct indexing?
The silence and no reaction to the ditching, scraping, and terminating, shows that Wealthfront has been compensated to walk away from the deal. In my opinion, this has been designed and executed by Naureen Hassan, the new president of UBS Americas announced in mid-July.
She is the leader that launched Schwab’s Intelligent Portfolios offering in 2014 and subsequently became Morgan Stanley’s chief digital officer. She has been credited for the integrations at MS which have led to their unique Connected Client Journey offering.
Her focus seems to be more on content and insights and connecting customers through the UBS Circle One offering.
As Ron Shevlin would say, `The role of online digital planning has changed today and Wealthfront isn’t an innovator anymore`. They have pivoted and added functionalities a la Robinhood (allowing DIY trading) and a la Sofi (banking services) and a la traditional complex funds (with WFRPX). If Hassan can execute on digital content, insights, and communities, and accomplish unification, then no need to deal with a foreign and tainted culture like Wealthfront`s.
Nowadays, Integration is the key to unlocking value in financial planning.
I speculate that they paid Wealthfront c. $300 million to walk away from the deal and have included some counterparty agreements that are favorable for UBS (similar to the swap counterparty dealings). Hassan knows very well how cultural conflicts can wipe out the value of any such acquisition and has therefore made this choice to work on a clean sheet and deal only with the existing internal frictions. She also knows the digital planning market better than anyone else. Wealthfront does not offer value in the integration needed at UBS, on the contrary.
If I put on Paolo Sironi`s glasses and thinking hat, then maybe Neureen Hassan aims to steer UBS towards OUTCOMES not Outputs. These Outcomes could be offering at scale personalized financial planning insights and enabling digital communities with similar financial goals.
UBS came up in our discussion with Paolo Sironi more than one year ago, as a hypothetical example of a financial institution focusing on outcomes as part of transforming into an ecosystem platform! Listen (if you are busy just go to 2:27–4:00) `Focus on Outcomes to succeed during the Ecosystem Platform Revolution`
What a coincidence!
I also echo Tim Welsh who said when the Wealtfront UBS acquisition was first announced `Alanis Morissette must have had such a scenario in mind with her hit single “Ironic”`
Tim Welsh is CEO and founder of Nexus Strategy
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