UBS buys Wealthfront - an example of how leading incumbents build growth engines by investing in tech ventures

UBS buys Wealthfront as the 'foundation' for future growth among Millennials and Gen-Zers.

UBS acquired retail wealth-tech startup Wealthfront for $1.4 billion as its growth engine into millennial and Gen-Z investors who will "own an increasing share of the world's wealth".

Meanwhile, many European competitors, including Credit Suisse and Julius Baer, are sticking to previous generations where the high end of the market and superior profitability may be found today.

No doubt, conquering millennial/Gen-Z retail wealth management is tough and risky. But to quote Mark Zuckerberg:

"In a world that's changing really quickly, the only strategy that is guaranteed to fail is not taking risks."

When you look at a standalone digital wealth management service for retail investors, the unit economics can look dire. Customer acquisition cost (CAC) in wealth management is extremely high, estimated at $3,119 per client, according to a recent Kitces Research Report. This is in line with what UBS is paying for Wealthfront ($1.4bn for 470k customers ~ $3,000).

Meanwhile, the management fees are razor-thin. At Wealthfront’s 0.25% of AUM fee, you need $40bn in AUM to hit $100m annual revenues. It has taken the biggest players in the game - Betterment and Personal Capital along with Wealthfront - the better part of a decade and a half, and $200-$435 million of venture capital resting on the founders’ shoulders, to reach just about three-quarters of that magic AUM number.

Wealthfront's total AUM is around $27bn. This means the average AUM per client hovers around ~$50,000, generating annual management fees of ~$125-$140 per client. Now, wealth management services might be sticky, but retention rates on robo-advisor apps are below-average in this category; it would be fair to assume that - on a standalone basis - this business is a far cry from the 3:1 LTV-to-CAC ratio rule of thumb.

The name of the game then becomes to increase average revenue per user (ARPU) by offering existing customers additional services. There are several models to achieve this, from referrals to third-party financial service providers, to gradually building out a fully-fledged bank. This is where incumbents can come in and deliver a win-win.

In the hands of UBS, a ‘full-service’ bank, Wealthfront’s 470,000+ younger generation clients in wealth management could be “the foundation” not just to power the growth of UBS wealth management business, but to cross-sell other financial services (credit, CASA, payments...) and gain share of wallet among millennials and Get-Zers, spreading customer acquisition cost among more revenue-generating services -i.e. higher LTV over CAC.

Thinking about the value of the startup once embedded in the 'Mothership', and the unfair advantage to the venture it can yield, is key to making the deal work.

Arguably, the deal doesn’t come cheap. At $1.4 billion in AUM and a presumed annual revenues of around $67 million, Wealthfront is being sold for around 21x its current annual revenue. That’s a SaaS-style multiple, despite presumably lower gross margins and less net-dollar retention for SaaS, generally speaking.

UBS will have to aggressively leverage the acquisition wisely boost ARPU from Wealthfront's customer base and beyond, procuring new customers among the new generations. It's a smart buy, but also a long road ahead.

But UBS is not the only one building, and investing in, new ventures in order to stay relevant and fuel future growth.

Goldman Sachs has added its Marcus and Ayco business lines which provide retail wealth management and workplace financial planning, respectively. Marcus was built in house while Ayco was purchased in 2003. Merrill Lynch launched Merrill Edge in 2010 as a self-directed retail trading platform for clients. Morgan Stanley purchased online broker E-Trade in 2020.

These companies understand that building a pipeline and portfolio of new ventures as their engine for future growth, enabling them to tackle new markets and segments with agility, is critical for them to survive and thrive.

“If you stand still, you fall backwards. There is no stasis” - J. Peterson.