How Does Wealthfront Make Money?

Wealthfront is an automated Fintech investment platform providing investment, retirement, and cash management products to retail investors, mostly making money on the annual 0.25% advisory fee the company charges for assets under management. It also makes money via a line of credits and interests on the cash accounts.

Origin story

Based in California, Wealthfront is an automated investment service providing investment, retirement, and cash management products to retail investors.

It was founded in 2008 by Benchmark co-founder Andy Rachleff and Dan Carroll as a mutual fund analysis company. The company quickly pivoted into wealth management, growing its assets under management in the following years.

In 2020, Wealthfront made the Business Insider Top 10 Best Robo Advisors. Shortly thereafter, the company updated its mission statement to position itself as a company that favored people and not institutions.

Wealthfront now targets tech-savvy Millennials offering them an automated, data-driven investment service with significantly lower fees.

Wealthfront business model

The Wealthfront revenue model is mostly based on the annual 0.25% advisory fee the company charges for assets under management. For example, an individual with $7000 under management would be charged $1.46 per month.

Although this fee is less than a quarter of the industry average, Wealthfront trusts that their lower fee model will attract larger investor balances. This is particularly important for the company when one considers that they do not charge a management fee for any balance under $5000.

The company also passes on a 0.07-0.13% fund fee to the consumer. This is a fee charged by the companies that manage the index funds Wealthfront ultimately invests in.

College savings plan

Wealthfront also offers a 529 college savings plan, allowing parents to put away money for the future tuition of their children.

The plan is a regular investment strategy using low-risk index funds to minimize capital gains tax. For this service, Wealthfront charges the same 0.25% advisory fee plus an administration fee of 0.01-0.05%. Exchange-traded fund (ETF) managers also pass on a fee of 0.11-0.15%.

Portfolio line of credit

Wealthfront also offers a line of credit, allowing consumers to borrow money directly from the company.

Depending on the amount borrowed, Wealthfront charges interest fees of between 2.40 to 3.65%.

Cash accounts

For consumers wanting a banking solution, Wealthfront has them covered with a range of various account types suited to individual needs.

The company earns revenue on the cash in customer accounts by lending it out to other institutions. It also makes money whenever the customer makes a purchase using their debit card.

In this scenario, merchants typically pay a 1% fee to Visa which is then shared with Wealthfront.

Key takeaways:

  • Wealthfront is a financial services platform aimed at Millennial consumers who desire a low-fee investment and banking platform.
  • Wealthfront drives the majority of its revenue through a low-cost management fee model. Although it makes less money in management fees than some other platforms, it hopes to attract larger portfolio balances in the growing retail investor market.
  • Wealthfront also makes money by offering a direct line of credit to eligible consumers, charging interest according to the amount borrowed. The company also gives young parents the ability to invest in their children’s college tuition, helping them minimize capital gains tax in the process.

Connected Business Models

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M1 Finance is a North American online trading platform for common and preferred stocks and exchange-traded funds (ETFs). The company also offers margin lending, cash management, and a checking or debit account service. M1 Finance has a standard assortment of revenue streams for an investment platform. As a market maker earns money on the bid-ask spread, M1 Finance also offers a single premium subscription dubbed M1 Plus, and through interest and interchange fees.
SoFi is an online lending platform that provides affordable education loans to students, and it expanded into financial services, including loans, credit cards, investment services, and insurance. It makes money primarily via payment processing fees and loan securitization.

Read Also: Robo-Advisors, SoFi Business ModelBetterment Business ModelM1 Finance Business Model.

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