“I know this doesn’t sound like rocket science,” says Adam Nash, slowly working through a huge cup of coffee in a cafe off Central Park in New York City. “But nobody else out there does it.” Nash is chief executive officer of Wealthfront, a startup that uses automated software to invest customers’ money for low fees (0.25 percent on balances of $10,000 or more). He is talking about a new product Wealthfront calls “the single-stock diversification service.” Available only to Twitter (TWTR) shareholders, the Web-based program helps customers unload their stakes slowly, avoiding one-day price crashes like the 18 percent hit the social network took on May 6, a day after a trading restriction on stock held by employees and early investors was lifted and about 480 million shares of Twitter hit the market.
Lockup expiration days are typically volatile, as insiders rush to sell. It’s the kind of impulsive investing move that Wealthfront is trying to correct. The startup says more than 10 percent of Twitter’s 3,000 employees have signed up, with more than $300 million in current and future stock grants between them; 60 percent have chosen to diversify their holdings over a period of two years or longer. “People assume employees are eager to sell on the first day,” Nash says. “We were really impressed. … It reflects some prudence in the market, which is different than previous booms.”
Based in Palo Alto, Wealthfront is one of a pack of startups racing to dominate the market for online investment management, in which algorithms replace costly human brokers. Betterment, Personal Capital, and other companies follow basically the same creed: Most people should choose ultralow-fee funds that passively track an index, instead of trying (and usually failing) to beat the market. Many of the robo-advisers, as they’re called, have seeded their customer bases with young Silicon Valley types. It’s a logical place to start—the people most predisposed to trust a technology startup with their money are likely employees of other technology startups with lots of money.
In recent months more of that money seems to be ending up with Wealthfront, helping the company stretch out a lead over archrival Betterment. While Betterment has three times as many clients—34,400—Wealthfront has larger accounts, with an average balance of about $90,000. After starting 2013 with $100 million under management, Wealthfront reported $809 million in assets on April 1. Betterment said later that month it had $502 million. Personal Capital says it passed the $500 million mark on May 7. Betterment is still fiercely competitive, lining up $32 million in funding on April 15 on the heels of a similarly sized investment in Wealthfront earlier in the month.
David Blanchett, the head of retirement research at Morningstar (MORN), says workers who have a lot of wealth tied up in employer stock risk a double whammy if the company starts to do poorly. “It really doesn’t make a whole lot of sense to combine your human capital and your financial capital,” he says. The Wealthfront program “could be very valuable for Twitter employees. … They’re offering what appears to be a service that’s automated and relatively cheap.”
Nash, 39, says the company will expand its single-stock diversification service to more companies, giving it a boost toward $1 billion in assets. “Our plan is to open it up to everyone,” he says. Twitter is the company’s fifth-largest source of clients, after Google (GOOG), Facebook (FB), LinkedIn (LNKD), and Microsoft (MSFT). About 60 percent of customers are under age 35. “In a country so obsessed with Generation Y doing poorly,” Nash says, “it’s so big, at 90 million people, that there are still millions who are doing really well.”