Nota bene: Caldbeck vs robos

Earlier this week, I published a column at Wired on Wealthfront, and how it has moved in a very worrying direction in recent weeks. Wealthfront was one of the first and most prominent roboadvisors — companies which essentially replaced human financial advice with an algorithm. And while I was a fan of the company when it adopted that model, it’s now doing things I really don’t approve of.

So you would think I’d be on board with Ryan Caldbeck’s criticism of the company, as laid out in a tweetstorm on Saturday. But the fact is that Caldbeck and I are coming at this from completely opposite directions, and I deeply disagree with his analysis.

So let’s go through Caldbeck’s tweets.

Ryan Caldbeck@ryan_caldbeck

1/ I look at @Wealthfront's latest down round and I’m scratching my head on the LT strategy for robo-advisors. I don’t see a moat in tech, business model or financial product offering from any of them. https://t.co/SaqQoxvadN

March 24, 2018

The news hook here is that Wealthfront recently raised $75 million at a valuation which was (reportedly) lower than it had managed to receive in the past. And it sets the scene for Caldbeck’s analysis, which basically comes down to a question of how Wealthfront should try to get its valuation back up. That’s already a vastly different frame from my analysis, which was based on the idea that Wealthfront has already made some pretty desperate measures in terms of trying to improve its valuation, and that those measures were a very bad idea, badly communicated.

Caldbeck then immediately starts looking for a “moat”: something which is unique to Wealthfront (or, perhaps, to independent robo-advisors more generally) and which will protect their profits from competition. He doesn’t see one; neither do I. But you don’t need a moat to succeed, certainly not in Silicon Valley. Dropbox just went public and is now worth $12.5 billion; that’s not because it has a moat. It’s just because it does what it does very well.

Ryan Caldbeck@ryan_caldbeck

2/ I’ve said for years the robo-advisor algorithms aren’t defensible. @CharlesSchwab built one in months. Now @MorganStanley is. https://t.co/5FOCBQiqPO

March 24, 2018

Wealthfront and Betterment are, at heart, passive investors. They put you into index funds, sit back, and do basically nothing. They might tweak the nothing around the edges, with things like tax-loss harvesting, but the big picture is a set-it-and-forget-it one. So can they offer something which, at heart, cannot be reproduced? Of course they can’t.

But they are doing something pretty unique, all the same. Charles Schwab’s robo includes a pretty nasty cheat, which forces you to keep a useless cash allocation just to boost Schwab’s own bottom line. And Morgan Stanley’s, similarly, is designed to steer you into Morgan Stanley’s own products. That’s bad. Betterment doesn’t do that, and Wealthfront didn’t do that either, until February. For all that their algos might not be “defensible,” the fact remains that no one else is doing what they’re doing.

Ryan Caldbeck@ryan_caldbeck

3/ Across tech, algorithms are almost never defensible. Data is, provided it is unique and important. If @Wealthfront, @Betterment, @PersonalCapital can leverage their data for a moat, great. If not there is trouble.

March 24, 2018

I’ll agree that Personal Capital is a data play, but then again it never pretended to be a robo-advisor. And I’ll even agree that Wealthfront and Betterment might be in trouble, insofar as they’re not growing as fast as their VC backers would want them to. I said this when Simple was sold to BBVA: financial companies, at their best, are inherently boring, and probably shouldn’t be owned by VCs looking to make a fast killing. It’s taken Vanguard 43 years to become the giant it is today; VCs don’t have that kind of time horizon.

I certainly disagree with Caldbeck when it comes to the idea that if you can’t do something a bit skeevy, like making money from selling your users’ financial data, then you’re in trouble. As we’re currently seeing with Facebook, companies would be well advised not to go down that road right now.

Ryan Caldbeck@ryan_caldbeck

4/ As an aside, I don’t think UI is the top consideration in 2018 for this product. Making money is (free trades, unique product, etc). Do the Robos have a better UI than Schwab? Sure. But when purchase decision is worth tens or 000s of thousands of $, Schwab’s is good enough.

March 24, 2018

Here’s where Caldbeck and I diverge entirely. I absolutely believe that UI (the user interface, basically the look and feel of the app and website) is what distinguishes Wealthfront and Betterment from their competitors, and is the main reason why people are signing up with them rather than with Vanguard.

Because here’s the thing: The people signing up for a low-cost passive investment strategy are not motivated by making money. That’s the passive-investment revolution, which Caldbeck (an active investor himself) fails to see. The robo-advisors’ customers just want a simple and easy way to save their money for retirement, or maybe for a down-payment on a house, or just for a rainy day. They are not trying to make millions and beat the market.

So yes, if you think that investing your retirement funds in a world-beating fund will end up making you millions, then maybe the decision of where to put your money is indeed worth tens of thousands of dollars, or even millions of dollars. But for most of us, it isn’t. And it’s certainly not for the robo-advisors’ target audience. Caldbeck, on a deep level, just doesn’t understand what passive investment is all about. And so long as he doesn’t understand that, he won’t understand what the robos are doing.

Ryan Caldbeck@ryan_caldbeck

7/ Why are they not experimenting with alternative asset classes to build a financial product offering advantage? I don’t understand the refusal to partner with someone like @realtyshares, @LendingClub etc. to offer clients something other than the S&P500.

March 24, 2018

Yes, I skipped here from 4 to 7, and I’ll skip more from here on. That’s because Caldbeck goes off on a tangent of talking his book, and specifically of talking up a stock-trading startup called Robinhood. If you want to trade stocks, then by all means use Robinhood! But Robinhood is not in the same business as the robos, and it’s absolutely not part of the passive-investment revolution. Can you use your Robinhood account to just buy an S&P 500 ETF and sit back and do nothing? Yes. Does Robinhood’s messaging encourage you to do so? Hell no. So, if you believe in passive investing, Robinhood might not be aligned with your beliefs.

Until last month, however, both Betterment and Wealthfront were aligned with your beliefs. Precisely because they didn’t try to push you into “alternative asset classes” or “a financial product offering advantage”. Those products rarely end well.

Specifically, Caldbeck thinks the robos should put their clients, many of whom have relatively little in the way of savings, into highly-illiquid real-estate and personal-loan investments. Those investments might be great for rich people looking for diversification. But you can’t sell them easily, if and when you want to, say, make that down-payment on that house. So if you invest in such things, you need to know exactly what you’re doing, and you should definitely have some kind of human being walk you through it. Which is precisely what the robos don’t have!

But really, in order to understand where Caldbeck is coming from, you just need to jump forward a couple more tweets. What’s the worst possible thing that a retirement-funds advisor could put its clients into? Well guess what Caldbeck thinks that Wealthfront and Betterment should do.

Ryan Caldbeck@ryan_caldbeck

9/ At the very least, get into Crypto. Just something that wont also be offered by Etrade tomorrow. https://t.co/bggPGWoRJK

March 24, 2018

lol.