"I'm not usually shocked, but this shocks me," veteran industry consultant Gavin Spitzner said in a LinkedIn post right after the world learned of the head-turning acquisition of the original robo-advisor Wealthfront by the legacy bank and wirehouse UBS. Because Wealthfront founder and former CEO Andy Rachleff has long been a vocal critic of the banking and investing industries, this deal definitely hit the industry with surprise.
"Everyone hates their cable guy, and everyone hates their banks," Rachleff famously said at an industry conference in late 2019. He immediately followed up that statement in a more conciliatory tone to say, "However, we realized that a checking account is a better entry point for millennials than an investment account."
Rachleff was commenting on the move Wealthfront had recently made to pivot into online banking as the growth in his robo-advisor was slowing. This was primarily due to everyone realizing that early adopters of robo-advisors were actually do-it-yourself investors who have always been attracted to low-cost options, and not clients with significant wealth and more complex needs that human advisors have typically served.
Since there were no barriers to entry, industry incumbents such as Schwab, Fidelity, Vanguard and even Merrill Lynch quickly launched similar robo-functionality, but with a devastating twist — they offered it "free." Thus, the venture-capital-backed disrupters were ultimately disrupted by the very same group of incumbents they were trying to displace. Alanis Morissette must have had such a scenario in mind with her hit single "Ironic."
As a result, Rachleff and his believers are swallowing a bitter pill for having come with much fanfare to disrupt wealth management, only to find themselves thwarted by the formidable power of the human advisor. This undoubtedly encouraged their impatient VC investors to sell out to the first buyer that came along — even if that buyer was the absolute antithesis of their vision, in the form of a 160-year-old bank and wirehouse.
Despite this juicy schadenfreude, when you delve into the details in the UBS offer, it immediately becomes clear that it was a deal that Wealthfront and its VC backers couldn't resist.
Let's look at the numbers to see how rich a deal this turned out to be and why Wealthfront had to remove Rachleff and his anti-advisor rhetoric from the CEO slot just months before in order to sell out in a big, big way.
Inside the Numbers
According to stats from TechCrunch, UBS is buying roughly half a million customers for $1.4 billion, or around $3,000 each. The problem with this valuation, though, is that the actual revenue per account is a fraction of that $3,000 purchase price.
Dividing Wealthfront's $27 billion AUM by its 470,000 clients equals a relatively small AUM per account of $57,000, and Wealthfront's pricing schedule of 25 basis points (the first $10,000 is free) means that UBS is paying $3,000 for just $117 of annual recurring revenue (ARR), which is problematic when looked at on an ROI basis.
Assuming that we use a market return of 7% for the discount rate, no matter how many years I plugged into my net present value calculator, the result was always dramatically negative, meaning there will be no future payoff from current clients. That's even if those accounts all immediately doubled or even tripled in value tomorrow.
Along these lines, let's take another look at the numbers from TechCrunch in terms of multiples of revenue to gain further insight. Given Wealthfront's annual revenue of roughly $67 million, a $1.4 billion deal value creates a revenue multiple of 21 times!
That's a staggering valuation considering that Schwab paid roughly 4.3 times for TD Ameritrade's revenue and Morgan Stanley paid 4.6 times for E-Trade's revenue to acquire those highly profitable and growing digital businesses.
So there must be other reasons why UBS would pay such a premium for a tech startup that never really started up after more than 14 years — which in the tech world is about 589 dog years.
According to the company release, UBS is touting the ability to now go after "affluent Gen Z and millennial" investors through Wealthfront's digital platform. That makes sense, but as we have seen, Wealthfront's recent growth has been only after it started offering banking products and services, not investments.
