Want CNET to notify you of price drops and the latest stories?

Wealthfront takes on Wall Street--Silicon Valley style

The startup is launching a system to manage all your assets. It's target customer: Techies who strike it rich.

Paul Sloan Former Editor
Paul Sloan is editor in chief of CNET News. Before joining CNET, he had been a San Francisco-based correspondent for Fortune magazine, an editor at large for Business 2.0 magazine, and a senior producer for CNN. When his fingers aren't on a keyboard, they're usually on a guitar. Email him here.
Paul Sloan
3 min read
Wealthfront's new service (click to enlarge)

There's a lot of sudden wealth occurring in Silicon Valley these days, and that's leading to a parade of suits--aka wealth managers--trying to snag customers from the hallways of Facebook, LinkedIn, Zynga and other hot companies.

It's a parade that Wealthfront wants to rain on.

Wealthfront, a startup backed by Marc Andreessen and other Valley luminaries, is trying to upend the old-school money management model by replacing it with a system powered by software. The pitch: Why trust your money to a Wall Street money manager who charges steep fees when well-designed software can do a better job for a lot less?

"Our goal is to democratize access to sophisticated financial advice," says CEO and President Andy Rachleff, a former general partner with Benchmark Capital. "This area is ripe for disruption."

To that end, Weathfront today is launching Wealthfront Online Financial Advisor, a slick and fully transparent system for managing a diverse portfolio exchange-traded funds of six kinds of assets, including U.S. and non-U.S. stocks funds, commodities, REITS and bonds.

Anyone with as little as $5,000 can open an account and Wealthfront charges no fees until your account exceeds $25,000. The pricing model, in fact, is the opposite of traditional advisors, who charge more for people with smaller amounts to invest.

"Most people won't help you until you're wealthy," says Rachleff, pointing out that Wealthfront's fees are 75 percent lower traditional financial advisors.

The timing, it seems, couldn't be better. The growing Occupy Wall Street movement underscores the widespread distrust of big Wall Street firms. And, more importantly, Wealthfront's initial target audience is newly rich tech workers, which thanks to a steady flow of startup acquisitions and the comeback of Internet IPOS, there is no shortage of.

These are folks who want to do things themselves and are obviously comfortable relying on Web. "These people aren't in middle of the country and they don't need handholding," says founder Dan Carroll, himself a Midwesterner.

The business, initially called KaChing, began three years ago as a Facebook game that allowed people to virtually manage stock portfolios. That evolved into a system that let people invest real money and mirror the performance of professional money managers. What Carroll and Rachleff kept hearing from users, however, was that they wanted a system that was more complete and offered more than U.S. stock funds. And that's what they built, tapping into open source software developed--in a nice twist--by Goldman Sachs.

Algorithms personalize investment portfolios (click to enlarge)

At the core of Wealthfront's system is what's called Modern Portfolio Theory, which holds that owning different asset classes is the best way to maximize return while minimizing risk. It's a model that, while debated, has held up well even through the big market volatility and is widely used by high-end money mangers.

Wealthfront automates this investment model by asking users a series of questions--including whether you have angel investments, a nod to its target customers--that it runs through its risk-assessment algorithms. It personalizes a plan, and shows you all the investments it's suggesting before you commit a dime. Sign up, and your money gets held with Interactive Brokers, which Weathfront uses because it's inexpensive.

Wealthfront has 20 employees and has raised $10.5 million, mostly from DAG Ventures. Rachleff says the business needs $1.5 billion under management for Wealthfront to break even. If this catches on among techies--its signed up early customers from Facebook, Zynga, LinkedIn, Skype, Google, and so on across the Valley--the company then plans to go for a wider audience.