Many of our most popular financial advising firms offer forms of automated, algorithm-based advising, but Weatherfront, founded in 2008, was one of the first. A so-called “roboadvisor” firm, the company founded in Palo Alto, California, built its platform from the ground up with online management in mind, requiring moderate to limited human interaction. Dr. Chris Brummer interviewed its CEO and co-founder, Andy Rachleff, on the benefits of automated personal finance and its future as a new generation of personal investors takes interest. Financial technology that makes personal investment more accessible is right in Dr. Brummer’s wheelhouse. Not only is his career dedicated to keeping up with the latest advancements in financial technology, but he has also scrutinized what those advancements mean, both good and bad, for new investors and consumers. Fintech at its best opens doors and democratizes the world of finance and, in the case of roboadvising, offers expert financial advice to users who may not necessarily have the resources to access it.
Dr. Chris Brummer, who describes himself on his twitter profile as neither a technophobe or a technophile—but instead as a “technopragmatist—takes considerable steps to stay as neutral and analytical as possible in his interviews. By day, he is a professor and faculty director of Georgetown’s Institute of International Economic Law, and has dedicated his career to keeping up with developments in banking and capital markets in Washington, D.C., where he lives with his wife, Rachel Loko. Roboadvising is just another innovation encompassed under the fintech umbrella. On his podcast, Fintech Beat, Dr. Brummer interviews experts and insiders in financial technology to explore the “intersection of policy, finance, and tech” for the benefit of potential investors and enthusiasts alike. He is also the founder and host of the DC Fintech Week Conference, a weekend of panels and discussions in the nation’s capital with the goal of democratizing information about the future of financial technology. His paper, “What Do the Data Reveal About (the absence of Black) Financial Regulators?” was published by Brookings last year and is a testament to his interdisciplinary approach to regulation; incorporating race, class, and demographics into his empirical work. He also served on President Joe Biden’s transition team after the 2020 election, and joined Fannie Mae’s board of directors in February of 2021. Dr. Brummer’s storied academic career saw him teaching at the University of Pennsylvania before his tenure at Georgetown which, coincidentally, is where Andy Rachleff served as a trustee in an Endowment Investment Board. It was in that role that he first began to develop not only the foundation for Weatherfront but the concept of roboadvising itself.
Rachleff began the episode by pointing out his own bona fides at Penn and as a lecturer at Stanford business school. Pointing to his own experience helping to manage Penn’s endowment, he observes that “[p]remier university endowments are the best managed diversified pools of capital in the world.” “And they’re all managed very similarly […] A lot of what they do is manual and spreadsheet based and I thought if you automate what they do in software you could deliver an 80/20 version of it to the masses.” An automated, re-balanced portfolio of index funds is now the kind of thing that can be signed up for with most brokerage firms and websites, but few have managed to innovate beyond what Wealthfront came out with in 2011. Having talked about the company’s origins, Dr. Brummer transitions to the company’s recent moves into online banking. “By integrating banking and investing, we’ve made it delightfully easy to grow your wealth,” Rachleff says. It’s an enticing offer and a balm to the meme-stock craze, focusing on diversification, lower fees, and long term growth. “We’re not trying to outperform the market,” Rachleff says, setting Wealthfront up not as a means to get rich quick, but to create consistent wealth over time.
The marriage of roboadvising and banking brings up a lot of the considerations about financial regulation that are foremost on Dr. Brummer’s mind. “People want to make sure they’re going to have their money when they need it, and that that money is going to be held safely,” Brummer points out. Wealthfront effectively operates as a user interface to a banking-as-a-service vendor, Greendot Bank. Every deposit is brokered, but insured, so interest can simultaneously be earned while money can still be spent functionally, like a checking account.
Because investment doesn’t happen in a vacuum, Dr. Brummer made sure to ask how the global pandemic has affected the world of investment. Rachleff enthusiastically explains the explosion in day-trading brought on by 2020, which saw more people indoors and pursuing new hobbies and interests. The culture of new, young investors – such as the ones responsible for the Gamestock crisis – could not have been possible without it. “Every ten years or so there is an event that leads to an explosion in day trading […] and one thing I can tell you is that when it happens it doesn’t end well,” Rachleff says, not mincing words, “And when it goes wrong, they want to come back to a boring supplier like us. You have to lose money through the other methods.” Rachelff boasts a compound return of 9% for his clients since Wealthfront launched.
Because the conversation turned to the new trends of 2020, naturally Dr. Brummer brought up cryptocurrency. Andy Rachleff was quick to dismiss the method as nothing more than speculation commensurate with buying gold. “Cryptocurrency is a speculation, it’s not an investment. I don’t recommend it, but if you want to do it on your own you can make your own decisions.” For Rachleff, crypto is a fad, and like other trends it will come and go.
In some ways, it’s not surprising that a long-term investor might shy from crypto- and blockchain-based technology – after all, they’re complicated systems and at the current frontier for financial regulation. The allure of index funds and the effectiveness of roboadvising are in consistent, gradual gains over a long period of time or, as Rachleff calls it, the boring side of investing. “The value proposition relies very much on simplicity.” That said, Dr. Brummer concludes by acknowledging that what started with businesses like Wealthfront has been adopted by banks and businesses (such as Coinbase) alike, alluring investors with intuitive user interfaces and democratizing access. “My hunch is that distinctions will become ever more difficult to make, raising challenges and opportunities across the sector for years to come.”
To learn more about Dr. Chris Brummer’s research, click here. Listen to the episode on Apple Podcasts or Spotify.