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Twitter Insiders Flock to High-Tech, Low-Touch Wealth Advisor

Michael Santoli
Michael Santoli
Demand for Twitter stock was 30 times greater than the supply as the popular social media company went public on the New York Stock Exchange. The price shot through the roof at the opening bell and it gained 73 percent on its first day. Elaine Quijano reports.

When the opening bell rang on Twitter Inc.’s (TWTR) celebrated stock-market debut, more than 1,500 employee millionaires were minted, and each one suddenly had the same happy problem: How to manage their new wealth.

With a world of investment advisors vying for the overnight affluent of Silicon Valley, one upstart wealth-management firm has signed on an outsized number of early Twitter employees as clients. Wealthfront, a young and fast-growing software-driven financial advisor, boasts that more than 10% of Twitter employees with vested stock holdings have opened accounts.

Twitterites who are millionaires on paper won’t be able to sell their stock for months or more, so they're heading to Wealthfront with savings they’ve built independent of equity awards. Most of them arrived through an early-access program furnished by Wealthfront a clever move by a company that's made itself a favored destination for the burgeoning nest eggs of the young techno-elite.

Aside from Twitter, the top five companies represented among the firm’s 5,000 clients are Facebook Inc. (FB), Google Inc. (GOOG), LinkedIn Corp. (LNKD) and Microsoft Corp. (MSFT).

Wealthfront’s core pitch of low-cost, software-centric, transparent investment portfolios seems to hold particular appeal for the technology-attuned under-35 cohort. One major selling point is that this approach to investing, rooted in empirical finance research, promises to enforce financial discipline and prevent newly well-off younger people from naively squandering their cash.

Protection from themselves

Among the ways Wealthfront’s homepage says it adds value – along with diversified portfolios, cheap index funds and tax-smart tactics – is “Protecting you from yourself,” a promise it punctuates with a smiley face.

Adam Nash, chief operating officer of Wealthfront and an alumnus of both LinkedIn and eBay Inc. (EBAY), says millennials tend not to be tempted by the allure of scoring blockbuster short-term investment gains. Having witnessed two stock-market crashes of 50% in their youth, “there is no appeal to them to try and ‘beat the market.’”

Multiple surveys have shown younger investors plan to save and invest more than earlier generations did at the same age, and that professionals in their 20s and 30s tend to have more-realistic expectations of what the markets can deliver over the long term.

Wealthfront is among an expanding group of low-touch, high-tech advisors taking advantage of the abundance of inexpensive, efficient exchange-traded index funds that offer access to most corners of the global financial markets.

Clients take an extensive risk-tolerance questionnaire, which generates a recommended asset-allocation mix among 11 broad asset classes, from domestic stocks and emerging markets to varieties of bonds and natural-resources investments. No fee is charged on the first $10,000 in an account, and anyone can take the risk assessment Q&A and use the results independently. Above $10,000, Wealthfront takes 0.25% of assets, in addition to the management fees on the underlying ETFs, which average 0.17%.

The autopilot appeal

Techies like the idea that, at Wealthfront, the software is always monitoring their account on autopilot – rebalancing among the funds daily and opportunistically collecting interim losses to offset taxable gains. The firm estimates its tax-optimization system can add an average of one percentage point to annual returns, net of commissions. 

Wealthfront's chief investment officer is Burton Malkiel, the Princeton professor and “Random Walk Down Wall Street” author who is probably the foremost advocate for resisting the urge to try to outperform the market. He preaches focusing on the three things under an investor’s control: diversification, low fees and minimizing taxes.

Nash - a Stanford-trained computer scientist and Harvard MBA who was a senior product-development executive at LinkedIn at the time of its 2011 IPO - gives a talk called “Personal Finance for Engineers” to tech-company insiders, emphasizing the ways even brilliant people fall into familiar behavioral pitfalls when it comes to their money. He says some push back, believing there must be a systematic way to outsmart the markets. But most respect the massive cache of academic evidence that the little guy can’t consistently outperform the markets, after costs are deducted.

Wealthfront’s assets under management have grown by 300% this year to $400 million, with essentially no advertising. Founded in 2008, the company originally aimed to bring expensive, sophisticated investment strategies used by huge university endowments (such as hedge funds and private equity) to the average investor. When that approach didn’t take off, the firm pivoted toward the current strategy: delivering one-stop, automated, inexpensive, you-can-sleep-at-night wealth management for the emerging affluent.

The firm and its peers are benefiting in part from the fact that traditional full-service brokerage firms such as Bank of America Corp.’s (BAC) Merrill Lynch and Morgan Stanley (MS) are increasingly pressing their advisors to focus on a few wealthy clients at the expense of many “mass affluent.”

Huge discount brokers such as Charles Schwab Corp. (SCHW) continue to gain market share, yet they are associated with a do-it-yourself baby boomer investment approach to some degree, rather than cheap, technologically elegant, turnkey wealth management.

Betterment.com has, for the past few years, offered low-fee, ETF-reliant portfolios that allow beginning investors to efficiently put money in the market. It promotes a bit more client discretion in tilting portfolios and boasts an ability to link to a checking account to program regular, small contributions to an investment account.

Nash describes Wealthfront’s core client as 25-35 years old with an average of $80,000 to $100,000 in his or her account there. For sure, those in the uppermost management and founder ranks at Twitter   with on-paper wealth from the tens of millions up above $1 billion are likely to opt for a full-service wealth manager. Goldman Sachs Group Inc. (GS), which led the IPO, has a wealth-advisory unit built largely to serve those made ultra-rich through stock offerings or by selling their business.

And, indeed, many Twitter employees now happy with the Wealthfront approach might pile up more wealth and “graduate” to more-traditional financial advisors.

But for now and some time to come, it seems, the young beneficiaries of the social-media boom will be happy to have smart software, rather than slick brokers, watch their wealth.