Hey buddy, Kevin Rose here. Welcome back to another episode of the Kevin Rose show in hosting this podcast. I feel very fortunate that I've had some pretty awesome guest on the show some pretty inspiring. Guess these would be some of the brilliant leaders and thinkers people that come to mind would be of course Elon Musk Jack Dorsey from Twitter and square Michael Pollan. I could name a whole slew of folks that were definitely fantastic people to have on the show and interview today's guest is right up there.
Ratcliffe he's brilliant in a way that at times as someone that's doing the interview it just kind of stuns you like it just some of the things that came out of his mouth. They just fly in the face of what I know to be true and when that happens it's a little frustrating because you're doing the interview and you have to pause to almost just soak it all in and then come up with the next question in a very good way. I thought this this interview had me wanting more knowledge from Andy so much so that
I even asked him to write a book. I don't think he has the time to do that. But it was a really fun interview for those of you that don't know Andy Radcliffe and E is the co-founder of Benchmark Capital, which is one of the most respected and successful Venture firms of all time just fantastic phenomenal results over the years. And today Andy is the co-founder and CEO of wealthfront, which is a next-generation automated investment service with about 20 billion in assets under management.
Now in full disclosure, I'm an angel investor and wealthfront but that's not why I had Andy on Andy is an absolute Legend So regardless of my investment. It was just great to have them on the show. And is Soak Up all that knowledge. Now in this episode we talk about entrepreneurship and like I mentioned much of what he has to say today, it goes against every Business book I've ever read in a very good way and of course we talked about investing automated versus stock-picking we talk about Bitcoin and gold Robin Hood the stock trading a
AB square cash and a whole lot more. Oh and one last thing. I just want to remind you make sure to sign up for my newsletter. I have a once a month or actually I would say once every four to six weeks newsletter that I put out that is just packed full of all the things I'm reading can be books podcasts products that I'm checking out. You can sign up for that at Kevin rose.com. I promise not to spam you and it's very infrequent. So when you get it definitely give it a click and I'm sure you'll find something good in there.
All right with that, this is Andy Radcliffe. Well Andy, it's great to have you on the show. Thanks for coming on.
Thank you for inviting me
so many things to talk about. I mean you are a legend in the tech space first and foremost having been one of the founders of Benchmark which for people that don't know Venture Capital. I'm sure most people would say is probably cast probably heard of Benchmark. But if you haven't, I mean definitely one of the absolute top 1% of 1% of all funds of all time.
It seems like there isn't a company on the consumer side that you've missed. I mean eBay Dropbox Twitter Uber Snapchat Instagram. I met could just go on and on of the great companies and Founders that you've invested in. I would love to hear about that founding Story. I mean you started the firm what 1995,
correct? Where were you in your career?
What were you doing? And why did you decide to start a venture capital firm?
Well, I had been in the Venture business for about 10 years 12 years.
Is actually and the firm that I was a partner at Merrill Pickard Anderson and I are which was one of the top five firms at the time had gone through generational transition to of the founding Partners. We're retiring that left three of us and we could either have taken that franchise forward or become free agents and two of the three of us ended up teaming up with a partner from TV. I another one of the Premier firms that
I was going through the same thing. That was Bob tegel and an entrepreneur from the Merrill Picard portfolio and a friend of Bob kegels from TBI and we got together and started Benchmark. So it was generational transition that to venture firms that really
instigated and in 1995. I'm thinking back to what I was doing, you know is obviously playing with Windows 95 what type of Investments were happening in 95. This is pre 1.0. So
Was it a lot of Chip investing at that time? Was there anything on the consumer
side? Well, actually one of the things that we talked about in our road show to raise money for first fun was a belief that consumer and Technology were coming together and that that would create some tremendous opportunities TV. I had been fortunate to be an investor in into it and that was probably the first example of
A company that was that merged traditional consumer marketing with technology. And so Bob Tagle coming from TV. I felt like that was going to be a really big opportunity. We even thought we would invest in pure consumer companies just to get some familiarity with consumer marketing to prepare us for the intersection of consumer in Tech, but pure consumer companies tend not to have
his good returns because there isn't the intellectual property that you can leverage. So we quickly get away with that and really focus on consumer Tech and we've made a lot of great Enterprise Investments over the years as well
back in 95. I mean AOL was I think probably the biggest player in the online space at that
point the I had invested in AOL at Merrill Picard
how you did WOW easy you saw this coming. I mean it was clear to you that the penetration of desktops in.
The home was going to be a real thing. I mean it was already well under it's on its way at that point. What did you think of the web back then?
Well, it was, you know, it's better to be lucky than good and the internet the commercial internet really took off beginning in 1995 with with Netscape and and then Yahoo, quickly or followed quickly thereafter. So the internet just started to take off when we started our fund then we got to take advantage of that.
That and that's why I say it's better to be lucky than good that there were some tremendous opportunities that that allowed us to build our reputation.
How big was the fun back in those days?
Our first fund was only 85 million dollars. As a matter of fact, it was the smallest Fund in terms of dollars per partner. There were five of us of any of the top firms and we are
Argument to the limited partners was we purposely capped the amount of money that we were going to manage in order to multiply the money more. So in return we wanted a higher percentage of the profits and that was very very controversial at the time and the people who bet on us were handsomely rewarded because our first fund I think was a 65 x fund. Wow. So for every dollar you
You invested in the fund you got out $65
that is phenomenal and we're business is obviously at this point in time where a lot more Capital intensive. Like they require just had larger Capital requirements to get off the ground would you say that was
true? Yeah, but you know, I think this is a Miss perception that people have every industry when it gets started has very modest Capital requirements, you know, you used to be able to start a computer company for a million dollars. You can start a disk drive company for less than a million.
In dollars, it's as the industry or Market matures that you need more and more Capital to gain an advantage. So I think this whole point about internet companies require less money than than other companies is not true at all Lotus got started on a couple hundred thousand dollars a Microsoft got started on even less.
So what are some of the themes when you think about the entrepreneurs that you've backed over the years some of them?
Some of the Great's and even the ones that you've interacted with that maybe you haven't backed what are the common traits that you would say. Are there any that reoccur that you just keep seeing over and over again?
Well, I would say the most important one is that they were able to observe an inflection point in technology that allowed them to build a new kind of product before others saw that and then the challenge became who wanted it. So that's the exact opposite of what?
Every book on entrepreneurship talks about as the way companies get started which is to look at a market try to find a problem and develop a solution that leads to really mundane outcomes. If you want to build a really big company you have to do the opposite you have to start with an inflection point in technology because without change their seldom opportunity that take advantage of that inflection point to build a product and then
Find a market that wants the product so start with the product look for the market versus the other way around it's higher risk and higher
return and what do you think about the you know the last few years, I mean certainly a lot of emphasis on on artificial intelligence. And do you believe that is going to be our next big you know, decade-long Pursuit is is more new interesting startups in that Arena or what? What are what are you looking at these days,
you know, well, first of all, I'm no longer a venture capitalist to have it.
One for 15 years. So I don't think about that but contrary to the way some Venture capitalists represent. It Venture capitalists are not Visionaries quite the opposite. They're opportunists. We don't try to predict what's going to happen. Our job is to recognize a great vision when we see it. It's the entrepreneurs who are The Visionaries. So I never try to
predict what intrigues you what it has excited you in the
Past like is it just that you are the first to kind of recognize that what the entrepreneur has figured out that excites. You look what does your gut tell you? How do you how do you decide to do an investment?
So not only must fit be have the opportunity to be big but you have to have an unfair Advantage. Otherwise, why are you going to be the winner versus someone else?
And how do you coach someone and whether it be an existing employee that's reporting to you or you know an entrepreneur that is doing this for the
First time I mean, they're bound to make mistakes. Are you a believer in CEO coaching? Like how do you take people from someone that just might be a great technologists and and apply some type of structure to get them to be able to manage people.
Well, I think they need to want to be a leader to be a CEO of one of my concerns with young CEOs today is they want to focus on product but they don't actually want to lead people but they still want to be CEO.
You can't be a CEO unless you want to lead.
And that's why I'm glad I'm not a venture capitalist anymore because I wouldn't do very well with the new generation of CEOs.
Do you have any recommendations for those folks that are like that they're willing to admit like they they don't have a playbook for this. Like how would you instruct someone that has a fantastic idea that has a great vision but just doesn't know how to naturally be a leader
let somebody else do it. That's that's
oh radical an idea just a head of product and bring in a CEO.
Yeah will be the chairman and and be heavily involved with the product and find someone with whom you can work someone in whom you have trust where they can lead the company and you can lead the product but there's no such thing as CEO of product right
in in, you know moving into what you're doing today and obviously is one of the
As a wealthfront, how do you see yourself still growing as an entrepreneur?
Well, I think that companies need to be built to learn and individuals successful engine successful individuals. I find are incredibly intellectually curious and built to learn the person who impresses me the most on this Dimension is Mark Zuckerberg.
I mean he is a sponge like no one I have ever seen then he constantly tries to get better and learn about more and more functions and the people I know who've worked with him or just astounded by the rate at which he improves some people think they know it all already and they tend not to improve at a rapid rate and they tend not to do as well. So the
Piece of advice that I give people actually for the last 15 years. I've been teaching technology entrepreneurship courses at Stanford Graduate School of Business and my part literally my parting advice to my students in every class is if there's one thing that you can do is keep on
learning and how do you recommend they do that? I mean is that through trial and error through books is that the surrounding yourself with high-quality people what
its surrounding yourself with?
High quality people and searching out high-quality people, you know, I am very much anti blog because people tend to revise history and write blog posts that make themselves look good or they have never had any success in their life, but they're really good writers and people mistake that for knowing what they're doing for knowing what they're talking about. So I try to seek out people who are
Experts in private conversation to learn from them as great advice.
How do you hire folks? Let's say for wealthfront when you're looking to hire someone what are the what are the traits that you're looking for? And what does that interview process look
like? Well, I prioritize passion over talent if they have enough Talent the person who is passionate about the opportunity is likely to invest more time learning.
And so they are likely to grow at a much faster Pace. They might be less capable than someone else. But if they're more passionate, they typically will pass that
person and how do you unpack that passion? Like when you are doing the interview process is there's a certain questions that you ask that you feel can kind of get to the core of that.
Well, I've been doing this for so long that I can tell actually more by the questions that the candidate ass.
Smee hmm, if you can tell when someone cares because they've prepared right and they come full of questions and not just questions but penetrating questions hmm. The person who is just interviewing a can't tell you what they're looking for. I mean, I love it when I meet someone who interviews with us and Facebook that person clearly has no idea what they're
Are doing right because how could you possibly interview at the two companies? They're radically different. It means you don't really know what you want to do with your career. So I want someone who really knows what they want and is just crazy about succeeding in getting better and they have a lot of upside. So I'll take chances on people who are really raw if they're passionate and they have enough
Talent.
And what's your mentoring process? Like let's say someone is really passionate they have enough talent, but they're not exactly where you needed to be in some particular skill set or how do you get them? Well, I mean, I guess they would take it upon themselves at that point to try and hopefully improve that area. But how do you help guide them?
Actually, I don't think that you should improve your weaknesses. I think you hire to your weaknesses.
I think you should double down on your strengths. That's if you look at really successful people. They didn't become successful by being good at everything they became successful because they were superb at something right and then they were able to work with people who were good at the other
things.
Interesting. So well, what about what let's say you have individual though that is like your head of marketing and they've got, you know, 80% of what they need, but there's a few blind spots there and you say higher to those weaknesses. Does that mean you try and fill an additional role to make up for their lack of capacity or am I understanding that
wrong? Well, the VP of marketing is not an individual contributor, so they don't have to do each of the functions themselves.
Elves if they're not good at email operations, they can always hire someone to do that or if they're not good at branding they can hire someone who's really good at that. Hmm. If they're not good at paid marketing advertising they can hire someone who's good at that they don't have to be great at everything very few. People
are know that's I mean that is totally understandable. I'm curious like how it sounds very in some sense. That sounds amazing in that.
You're it's flying in the face of every single Business book you ever read out there. I know which is fantastic and it really exciting because I love everything you're saying but at the same time it's like it almost sounds 2 lakhs and that how do you how do
you do even a
performance review with someone like let's say there are these things that are lacking like, how would you give them that feedback?
Well, Kevin you've worked in technology for a long time. You know that growth hacking were the growth function.
Is really just an example of what I'm talking about with regard to hiring. You. Don't try to improve the things that you're not good at. You double down on what's working. Right? So you don't do experiments around the thing that isn't working in your product you figure out what's working really well and you try to figure out how to make that even better. I'm just talking about applying that methodology to people huh?
Yeah. I just I think it's so rad.
So I'd love to see it in practice. It sounds fascinating.
I've seen it in practice my entire career.
It just hasn't been labeled that you mean like as a man called out as such
but that's what great Executives do and they piece together a team who complement one another or they at least attempt to you sound like what your approach is a lot more
holistic in a sense. It's looking at the whole organization as it like this living breathing organism that
You may have certain strengths you want to like accelerate and add fuel to the fire on and you have certain weaknesses that you want to kind of build up and in higher for how does this compare to say the hiring practices of like a Google where I feel like they're just looking for pedigree.
Well, they're used to I think they learn from the data that that it doesn't actually
work. Yeah, that makes
sense. I at one point in my career did that as well? And what I learned is that's not a very good way to hire.
People just because you have a great pedigree doesn't mean you're not going to succeed but it doesn't mean that you will either right you really need to look at the time that passion the rate at which someone learns and their judgment till I also look for proxies for
judgment. Hmm. Can he can you go into that a little bit deeper like give me some examples?
Sure. Look this the CEO is seldom the person who earned CEO versus the
Der is seldom the smartest person in the room, but they're usually the one that would the best judgment what's judgment its decision-making under uncertainty anyone can make decisions. If they have all the data the most impactful decisions in a business are usually the ones that are made under uncertainty. So by I look for I asked for situations in which there was a lot of uncertainty where they had to make a decision and what were the outcomes
a great example of this and a great proxy is what companies did you choose to work for what I find is that people who work for a very successful company come to understand what are the keys to success and they look for that in their next employer someone who's worked for two unsuccessful companies has no idea what to look for and they generally as a result make a
Vision based on compensation which only Dooms them to fail
again. It makes sense. Well, I guess jumping into wealthfront. Is there an example I'm curious to know when you do make a decision on something and it ends up not being, you know, it's imperfect information. You make a decision say product wise you roll something out. It doesn't work out what you do as the CEO. Are you someone that wants to get at the data understand? Why are you quick?
Cut something in terms of like getting rid of the functionality. How do you work that from a product standpoint?
Well, I'm a really big devotee of clay christensen's the Harvard Business School Professor who really developed disruption Theory and he coined the term in the innovators dilemma that I just love which is fail fast and cheap my great passion.
Is product Market fit I'm the guy who coined the term. I taught a course on it for 13 years at Stanford. It's something that I find is the absolute key to success of a business and I constantly try to figure out how to do a better job of finding and one of the things that's really clear to me is that if you don't find product Market fit immediately
You don't change the product you change the market you iterate on the market. You don't iterate on the product. And so if your your don't get traction immediately in a market you fail fast and cheap and you try a different market and if after trying two or three markets basically different hypotheses, they don't work then you cut bait.
How do you make that initial decision when you haven't even tested something in a new market, let's say it's a giant leap forward like
No comparing. What we had is smartphones back in the Windows CE e days to when the actual iPhone jumped out and just blew us all away. Like how do you when the market hasn't used it yet. How do you make the call to go after something a new idea? That is so novel and so different. Well, we've tried to
codify that I'm a big believer in The Lean Startup methodology where you develop a value hypothesis and test the value. I bought offices and only once you've proven
in your value hypothesis. Do you test the growth hypothesis? So the value hypothesis is the what The Who and the how what are you going to build for? Whom is it relevant? And what's the business model? That's the how one of the biggest mistakes that people make and I think this is really promoted by Y combinator is that you you first prove growth to get money and I think this is horrible because it's like building a house on a shaky Foundation.
You can game growth right? So I think the only growth that matters in the beginning as organic growth because you can only get organic growth through word-of-mouth. You can only get word of mouth. If you truly delighted your customer and found product
Market fit.
So in other words product Market fit is just a fancy way of saying you've proven your value proposition.
And how do you know you've proven it? Well in a consumer company its exponential organic growth. So if we don't achieve exponential organic growth right away, we iterate on the market building more features doesn't ever get you fit. That's the mistake that entrepreneurs continuously make
I mean just get the confusion right just makes the product more bloated.
Yeah actually removing features. Sometimes gets you the fit right? That's
Counterintuitive, right? The problem is not everyone myself included then our company included comes up with insights that are compelling we try and how do we test it? So we go we try to beg borrow and steal from other companies to to come up with ways to do a better job to validate hypothesis. We go through the customer development methodology. We use design Sprint's which we find to be incredibly helpful.
So to figure it out whether or not we've hit a nerve.
I'm a big fan of design Sprints. I think it's a fantastic process. It's one that has to Google quite a bit. Well, I'd love to jump in to talk about wealthfront because what a what a really cool novel idea when it first launched the idea of automating and Robo investing in a world that at the time was largely, you know, just paid managers that were charging you too much and seemed to be just putting you into whatever.
I thought walls and sometimes what they were compensated for.
Yes. That was the unfortunate part. Yeah
versus having a lot of it automated away in a much more efficient manners. Can you tell me kind of what wealthfront does today
sure, we describe ourselves as a next-generation banking service that helps young professionals manage their money. We do this with a with high interest checking and low cost Investment Management Services all delivered through
A five-star rated out the vision for the business is to automate all of your personal finances. So by this is a we've coined a term for this called self-driving money and what we mean by that is you can now direct deposit your paycheck with us will automatically pay your bills and then route the remaining money to the most appropriate savings vehicle depending on your situation or goals. And so
Basically takes a part of your life that most people don't enjoy and we automate all of it. We do it for incredibly low cost and we do it incredibly efficiently.
Well, there's a lot to unpack there. I think on the on the investing side. Can we just go into that a little bit on the Surly what you do with those funds because you know, I know that you have some really cool technology on in terms of the tax loss harvesting that you do and some things behind the scenes.
That they're different than a lot of other providers out there.
Well all you know, it's really funny people think what we do is fancier than what we actually do. What we've basically done is taken best practices that are used by the best financial advisors and we implemented them in software to automate them and by automating it we can write
Will you lower the minimum account size? So a traditional financial advisor requires an account minimum of a million dollars and we also lower the feed to a quarter of a percent. Whereas the average financial advisor charges one percent. So through automation. We're able to radically lower our costs which we can pass along and form of lower minimum and lower fees. So what do we do? Well, we started with a diversified.
Defied and rebalanced portfolio of low-cost index funds that was really simplistic by the way, you know, 95% of the people who say they offer robo-advisor. That's all they do. That's what we did when we started in December of 2011 and back then I used to say we add very little value and price accordingly. So since then we've added quite a bit of
Again, no proprietary algorithms just automating best practices. So one of the things that very wealthy clients of high-end financial advisors had available to them with something called tax-loss harvesting at the end of the year the advisor would look at the portfolio. And if there were losses they would sell those Securities to recognize the loss to lower their taxes and they'd replace the Securities that were sold.
With similar Securities, but not identical to maintain the risk in the return of the portfolio and 31 days later. They would replace the that security with the original security. Hmm. And so we've been doing that at the index fund level or the ETF level since the end of 2012 and the average premium.
So X benefit of that is about five percent of your portfolio value per year. So if your tax rate is 40% that means we save you on the order of two percent of your portfolio value per year. So that's eight times what we charges a fee. So it's almost ridiculous to try to do this yourself because there's we look for these these opportunities to harvest
losses every day. It's too hard for an individual or a traditional financial advisor to do that. Because if you think about a couple hundred clients and all of the different tax lots that they have to look at they just couldn't do it every day in a spreadsheet rain a computer doesn't care if we have you know, 200 clients or 200 million clients. It's no more work for a computer to do and so you can Harvest a lot more when you look for these opportunities.
These every day versus just at year end because the market might have gone down mid-year and going back up at the end of the year. So you don't have any losses but in our case, we would Harvest those losses.
How do you determine their? How does the algorithm determine when the right time to harvest is I was always confused by that because especially in like What markets we live in today? It's like how do you know if a 4% drop is even significant to harvest a loss
say, you know, we've gone back and looked at the data and it's generally
Thoroughly approximately a one standard deviation loss. Okay, we back tested this many times and that's generally the case. So we first did it at the ETF level and then we get it at the within the index. So we recruited Burt malkiel an Emeritus professor at Princeton who actually invented the index fund when he wrote a random walk down Wall Street, probably the most influential.
Look in investing ever and he said, you know, you're missing an opportunity here. You're harvesting among index funds why not Harvest within an index fund and by that, I mean that there are 500 stocks that comprise the S&P 500 well in any given day the S&P 500 might be up one percent but a number of the 500 companies within the index might have traded down a lot co-creative announced bad earnings.
Great, if Coke and Pepsi so you buy some Pepsi and then 31 days later you trade back into Coke and that adds another point two percent after tax approximately four months for most people every year there's obvious variance in that number. But again that pays for a fee again when times over so we did that and then we added something called smart beta which people like
The FAA charge half a percent a year to manage we do it for free because our marginal cost is so low and then we added something else called risk parity which at a hundred million dollar minimum at Bridgewater. We do it at $100,000 minimum and at a very low fee. So just automating these best practices that have been proven through academic research to work. We're able to deliver something that on a net of fees.
He after-tax risk-adjusted basis. You can't touch even the world's best financial and human financial advisor can't outperform because of their feelings. So that's what we do on the Investments. I did by the way, we automate the movement of money into your account and out of your account. You can transfer Securities to us. We won't sell them right away. We'll do that and attacks optimized fashion to minimize the amount of taxes that you pay so
We've there's all these things that we do that people who call themselves Robo advisors done. Don't come close to
doing it seems like there's been a mad rush by the traditional players out there too quickly, you know add the the robo-advisor language somewhere in their websites to say look, we're hip were young we do this to you know, you should stay with us and not leave because it seems that there's a lot of people have bailed on their traditional, you know old school advisor to move to something like
Well front I'm curious, you know the obviously in well in subreddits and the deeper places the internet like these days everyone trade stock trading tips there. Everyone's gambling these days things like Robin Hood app has become very popular and especially, you know enabling people like the average individual to actually leverage their dollars, which is just insanity. But you know, it is gambling. What are your thoughts on people doing individual stock
picking? It's a
Able idea in the academic research is incredibly consistent on this point, you know Burt made 48 years ago when he published a random walk down Wall Street. He basically for the first time explain to the world that they would be far better off buying a diversified portfolio of index funds or even investing in an index rather than trying to pick individual.
Ortiz, you know more than only something like less than 10% of professional investors outperform the market over five years and those are people who are doing it for a living every single day, so what makes an individual investor who's doing it with their spare time think they can outperform
The market the problem is that every once in a while. We have really significant increases in the market over a short period of time and whenever that happens we see day trading breakout
sure cuz everyone believes they're professionals. It's working, you
know, right because everything in this happens every 15 years ago. So the problem is like since the market bottomed in March or April the market is up.
G or 60% so if you buying individual Securities and and Europe 30% you think you're a genius because on an absolute basis, you're doing unbelievably well, how often can you increase the size of your portfolio by 30% over six months. The problem is you're actually a moron because if the markets up 50 or 60% if you had invested in an index fund you
We up 50 or 60% not 30 but B and so this is the problem with absolute versus relative returns, its relative returns that matter but most people who are amateurs only think about absolute returns, which is why they're thinking they think you're doing really well if they're up 30% the problem is when the market turns and the market is seldom up 60% over six months.
They will do really poorly if the market is down five percent or even flat because if they underperform that by 20% boy, then they're really in trouble. So it's not surprising to me that this is happening. It know it. It happened around the internet bubble and the late 1990s. It happened in 82 83 time period it always happens when we see a big increase in the market side.
It's fun hectic. I mean when when sport professional sports went away and you couldn't bet on Sports. I think that investing in individual stocks became an a replacement. Yeah,
there's no doubt about that. Do you feel like you need to serve that market though in the sense that like, I'll give you a great example. Maybe I'm just a rare small little market for you, but I have obviously have a well-thrown account. I
Think of it as my kind of conservative, you know risk or three like just like set it and forget it now don't worry about it. And then there's individual positions of companies that I really believe in, you know, like this like up-and-coming like the peloton's of the world or or the Giants not control on. That's not dangerous. That's correct. That's correct. So you're Buy and Hold I am buying hold. I'm buying hold like, you know, I've been holding Amazon stock for 10 years or longer, you know, it's just like that I feel did.
There's a place for that in inside of well front. Like what I eventually be able to have my Holdings there.
Well, perhaps it's not something we're focused on right now right now. We just want to make sure that that delegated managed solution works really well for you. If you want to consolidate everything with us, that's certainly something that we could consider instead what we've focused. Our development efforts on is adding the capability.
Bilities to deliver on that self-driving money Vision, which is why a few months ago. We rolled out a full Suite of checking features. So you can direct deposit with us. You can pay your bills and pay your friends with us. Electronically. We give you a debit card to do spending or withdrawals from are 19,000 free ATMs. You can deposit your checks.
Why our mobile app and very shortly you'll be able to send checks. So we give you a full Suite with no fees and it's a delightful user interface the likes of which you would never find in your bank and then a couple of weeks ago. We rolled out autopilot the first capability in our self-driving money sweet and autopilot monitors an account now, it can be your regular checking account or it can be your wealth from cash account that has all of these Trucking.
Features and whenever the balance goes above a threshold that you set by more than a hundred dollars, we will automatically sweep that money to your preferred investment account and will give you complete control and that we send you an email to let you know we're going to do it so you could cancel it whenever you want. But by doing this we completely automate your life now the money is going to move a lot faster if you keep everything out.
Out front meaning you can do your Banking and you're investing a 12th fret but if you prefer to do your banking elsewhere you can do that as well will automate your finances that way so we automate your savings in a way that just takes all of that burden off of you by the way. No one no one automate savings like that.
I've never heard of that before. This is the first I've ever even seen anything like that. Yeah. It's insane
because the the checking features are all.
Commodities everybody offers the same thing,
right? Well the thing that first attracted me to the wealthfront kind of checking account, I guess it was just the cash account back then was just that how insane the interest rates were and just no other bank is even giving you anything let alone. So that was it was just it was nice to
see well our philosophy you're so our mission is build a financial system that favors people not institutions.
So if we build all of this automation that lowers costs we want to share that with our clients. We don't want to keep all of that for ourselves who want to make money with our clients not from our clients. And so all we did is we are willing to take a much lower spread because it costs us a lot less money to operate the account so that we could give you a much higher interest rate. We pay the highest interest rate that you would find on any checking account equivalent.
Yeah, it's good.
It's great. How do you handle person-to-person transfers? I mean, there's obviously a big push from people like venmo which is- PayPal and square to support the unbanked and really make cash transfers is inexpensive and fast as possible. Is that is that a big push for you as well? I had yet. I haven't seen that feature in the app. Maybe I just haven't looked for
it and you won't we think you should use venmo or Square app or something else to do that. They're really good.
That why would we try to recreate something that they're really good at the nice thing is they work really well with us,
right because you're just another source of funds at that point. Exactly. Yeah. I love that you're saying that because I was worried that you were going to go into that smells pretty
heavily know. What we want to do is we want to focus our development efforts on things that add value that make your life easier on top of your existing Financial life.
One of the things that I was really well, I would love to
To see is the ability to kind of dial up right right. Now when you when you choose the funds that you're going to invest in on my behalf. It's all based on, you know one to ten risk score and that's something I can either take a quiz for and it says hey, I think you're an eight or I think you're nine. You're even more risky will there ever be individual knobs to say, you know, I would like a little bit more of this gold ETF or I want to dial down my International exposure a bit. Like do you think that's or
Would that just be completely automated
forever? Well, it all depends on if you prefer control over performance because our phds have done the work to figure out what's the best mixture of asset classes for any particular risk tolerance academics would tell you the only thing that matters in the composition of your portfolio is your tolerance for risk now?
Most people don't know how to determine that and that's why we built some algorithms for figure that out and and to balance out for the fact that people owe usually overstate their tolerance for us. So we don't ask you what is your tolerance for risk? We ask you some questions to get to try to figure out what it truly is and where the inconsistencies are. So by definition if you don't choose one of our
Our asset allocations you are likely to have a worse risk-adjusted return. So if you're telling me that you want you'd rather have control and performance. That's something that we historically have not paid attention
to is Odd as that sounds I think there are a lot of people out there that like to say, you know, what I do want a little bit more exposure to say technology for example, or I would like to have 5% of my assets being Bitcoin,
you know, I
completely hear you and historically I think maybe we've been too paternalistic because we want to try to keep you from making that mistake right because timing the market the research is really clear that the individuals by when the market goes up and sell when the market goes down. So what they're most likely to do is by technology when technology goes up right where buy Bitcoin when Bitcoin is up, that's the worst time to do it. And actually there's a company called doub.
That has been researching this for decades and they find that this costs you on the order of one and a half to three and a half percent per year on your portfolio return.
I have a standing order with wealthfront to essentially take I haven't done the the autopilot yet or the self-driving money piece of it yet, but it's basically take a percentage of what would be my savings every single Friday and it just does that like clockwork? So I'm just like constantly dollar cost averaging my way into the market. So that's kind of the way you'd recommend doing.
It that's what the data would
show is a better way to do it or or taking autopilot where it's a little bit more intelligent about your balance because some people want to make sure that they keep particular balance for their day-to-day transactions, right?
And then what are your thoughts on cryptocurrency? I mean being a technologist you must look at that and think it has some value or are you not not a fan. Well, I think it has
tremendous value as a way to reduce from friction and
injections
If you know MasterCard and Visa charge a really big tax on all transactions that has to be passed along in terms of the price that you pay, you know, they're they're earning something like 2.6 22.9% on every transaction. Well you as the consumer have to pay for that. So going to cryptocurrencies can eliminate that tax. So I think there's tremendous value there.
So do you see block?
It is a framework then like a framework for Transit versus say like a like a store of value like a goal like a gold like acid or something like
that. Well as an investor what I pay attention to is the fact that in order for something to be an investment. It has to have a cash flow because all that's tangible only only if an acid has a cash flow can it be accurately or somewhat accurately value?
Dude, if it doesn't have a cash flow. It's a speculation. Why is gold worth what it's worth? That's purely emotional right purely emotional. So gold is a speculation. I don't know any sophisticated investors that own speculations.
No university endowment which are the best manage pools of capital in the world own gold. They consider that ridiculous. So Bitcoin as as an investment is a speculation. It's not an investment. Therefore. I don't think it should be kept in a portfolio. Now if you want to do it for fun, like going to the horse track then by all means that's but it's a gamble. It's not an investment.
And
yes, it certainly gamble. There's no arguing that
there's no way to evaluate what it should be
worth. Yeah. I mean the only way you could evaluate our put some type of proxy against it would be like active participants in the network and actual real-world usage of the network itself. You can then you can see the underlying network has value
I understand but how do you translate that into what you pay
for? Yeah,
because unit I mean, how would you value a dollar or Euro? That's it.
Listen, I don't have time. You're not really I mean the dollar is so on pegged from reality right now. How do you even value the dollar
you don't but again you shouldn't be buying currencies as an investment their
speculations. Yeah. That's a great Point. What do you do? I'm curious and he's like when you when you're looking at the market and you're like, okay, I mean, we're in some weird times right now so much. It just feels like the market is just been propped up time and time again.
How do you define as someone that wants to get a little defensive do you just have them dial back their wrists shouldn't setting
shouldn't be offensive. You shouldn't be defensive. You cannot time the market. So Burt malkiel likes to say you cannot time the market. So don't even try just focus on the three things over which you do have control which our diversification minimizing fees and minimizing taxes and not surprisingly. That's what we deliver.
Dollar investment service
and then when you set your your risk or your tolerance for risk at that point you're saying okay forget the market what it's doing what it has done what it's going to do. It's more about when am I going to be retiring? Is that is that how you would what factors do you look at there?
Well, we look at your capacity to take risk and your willingness to take risk. So we refer to them as your object of and
objective tolerance for risk respectively. So what is your capacity to take risk? If you have enough if you're earning money at a rate that is growing at a particular rate and you're spending at a particular rate. Then you either can afford your lifestyle or you cannot and in perpetuity. So if you're likely to have more money in retirement than you need
Then you have more capacity to take risk. If you don't have enough money to fund your retirement. If you project all of this out, then you don't have any capacity to take risk in there for you shouldn't now some people, you know, go to Vegas if they don't have any money because they figure hey, I don't have anything I might as well bed at all to see if I'm going to get something but that's not very responsible. So that's your capacity to take.
Your willingness to take risk is based on your subjective reaction to particular stimuli. So if the markets down 10% so we ask you questions like if the market trades down 10% do you invest more do you sell or do you just stay
put right? So yeah, I would say buy more to that
one. Yeah, but the problem is almost no one who says buy more buys more. We actually have the data. That's the problem.
So we ask you a bunch of different questions and then we look for the consistency of the answers because if you say that you'll buy more but in then another emotional question like that you're less tolerant than you are less tolerant over also the more consistent you are the more likely you are to take risk the less consistent. You are the more we should go to the
The lowest common denominator, which is your LIF risk tolerant right bility,
but you don't ask it on the flip side, you know and say if the markets up 50% what does we do you do ask that? Absolutely. You don't say 50% though. It's something that's much smaller. Yeah, because I'm looking at this is my problem and I'm look at the markets. I'm like, okay, we're up 50% and I hear you II totally understand. Oh it's a but but you
gotta remember Kevin nothing about good investment feels, right? Yeah.
Yeah, so it makes no sense that mean it does not feel right to invest when the market goes down into sell when the market goes up, but that's how you make money. So literally nothing about good investing practices feels right and that's why almost everyone is terrible at it and when software takes emotion out of them.
I wonder what this is about my psychology in that I have no problem. I actually am one of the people one the
Down 10 15 20 % I really do buy more because I just know it's going to recover and I have confidence in that the flip side is my issue when the markets up 50% and I'm just like sitting there being like it's going to crash any day. Now we know and I have a hard time wanting to invest more
with all depends if you're trying to make money in the short term or the long term. That's why I tell people that if you need money in the next three years, you should not invest it in wealthfront. You should put in our cash account on which you are an interest.
Oh, but you should if you're going to buy a house, if you're saving to buy a house in the short term, you should not take Market risk, but if you're willing to invest it for more than three years then over the long term you're going to do just fine the markets going to be volatile. It's going to go up and down but over the long term if you just keep on dollar cost averaging into the market you're going to do exceptionally well, and actually the more volatile it is the more money the higher your ultimate net worth is
Going to be again. That's counterintuitive.
Why is that is it because the cost harvesting
but you know because you get to buy because if you're investing is consistent amount you're getting to buy a bunch on the dips, which is the equivalent of buying when something when the market is on sale, right? And so again, it's counterintuitive, but you end up with more money if you invest in a volatile Market,
Right that makes sense. Doesn't it doesn't feel right at all. Does it
well, and it's also crazy how many people don't know that if the market drops 20% They just think it has to recover by by 20% to get back to where it was. You know, it's like it's people don't often do the the full math here and one zone but one of
the we've actually we write about all these things in our blog and and one of the things that we pointed out is what do you think the average time to recovery from a
To recover is from a market correction where the market trades down
10% What do I think the average time? Yes. Yeah, it's hard to answer takes to recover that from 10% I would say. Well this is historically probably gosh. I don't know maybe a year and a half and you're in a quarter four
months four months. Everyone always thinks that it takes longer.
How about from a bear Market where it's down 20%
down 20% II would know I was just be guessing. It's a year and a half year and a
half. And so if you leave your money invested, it's like you're going to make 20 percent over a year and a half. That's a hell of a return right rather than trying to time it and figure it out.
Yeah, that's a good point. So this is why
I mean I was a pretty good professional investor. I don't
Stanley of my own money. I just Gala gated and do it this way. Yeah, and if you're building your career spending time researching stocks on which you're going to lose on a relative basis to the index would be far better spent reading and learning about your particular profession to get better at it.
Hmm.
So you mean focus on the increasing your earning power basically exactly. Yeah, so tell me, you know, I don't want to take up too much of your time. We're almost at our now. I'm curious though. It seems like you're just getting started with the self-driving money. Where does this all go? Like? What does this look like five years from now? What's the full
picture? Well, we have a long way to go in terms of the number of source sources and destinations for your money.
The number of places that we can monitor and the number of places we can send up money. We can ultimately send it to pay down your student loan and we can do that intelligently for you. So we only do it in particular interest rate environments and not another interest rate environment. Another thing that we can add a tremendous amount of value in his money movement speeding money movement. One of the things that we've learned over and over again is the faster we move money the more people trust us.
Is the more money they give us so if we can make money movement immediate.
Then you're the odds are you're going to love that. So in the fourth quarter, you're going to see us offer the ability to transfer money from your your checking account equivalent to your investment account the same time on the same day. You can't do that anywhere else. So if you're on the wealth from platform everything is going to be immediate
and as that investing in or coming out of either either way, it
can't come out of be
As of settlement right? So when you sell a secure were subject to that one restriction,
but you could float that that if you know that the settlement is going to occur or it has taken place like the sale has taken place. Couldn't you float the subtle?
Absolutely and so we can do really interesting things there too. So we basically want to get rid of float in the banking system, you know with our if your direct deposit at wealthfront you get your paycheck two days sooner what
I didn't realize until we started on this endeavor was that employers have to deposit your paycheck two days before you get it and that's because the bank holds onto it to earn interest on that money that's called float. So what we do is we give you the money as soon as the employer deposits it
that's amazing that has no idea.
I know it's just Banks make money in all of these Insidious ways.
In it's all based on, you know, two hundred years ago or a hundred and fifty years ago with the Pony Express. They took time to move all of this money, but when everything went electronic the bank still kept it.
Hmm and that's why our mission is to favor people over institutions to do the things that you would expect someone to do for you. So taking float out of the system as tremendous opportunity to build Financial Nirvana.
Yeah, it's some of the stuff you guys are doing is just so cool. Like two things. I want to mention real quick before we go. I love that you're doing it's like in my mind. It's almost functioning like a raid array on the back end.
Your Banks like you have multiple Banks supporting your checking service, right? So if I have a cash account, there are multiple Banks behind the scenes that are offering that FDIC Insurance. You can actually offer a larger Insurance than any other bank out there.
Is that right for a million dollars of FDIC Insurance because we we broker it out to a number of different or to four different fdic-insured banks.
So you're spreading out 250k across if we put a million dollars in you're doing 250k.
Across four Banks, it's brilliant.
It's all software then look you couldn't do these things manually. There's a lot of things that you can do if you automate them that lead to a better outcome.
It's so cool. The last thing I want to mention two, I actually had a buddy that was asking me about this and I told my bringing up on the podcast your interest rates for it. So he has a wealthfront account a bunch of dollars invested and you offer these real-time like loans against those equities, right?
And the rates are fantastic. I don't know what it was. It was to something percent. How does that work? Exactly. So you're locking up the equities taking out a loan and then is that how does that loan? Does that rate change over time? You're
describing are what we call our portfolio line of credit and we think it's the fastest easiest and cheapest way to borrow. So if you have an investment account with us, so that least $25,000 you're automatically
enrolled in the portfolio line of credit. There's no credit check. There's no work that you have to go through at any time that you want to borrow up to 30 percent of your account value. You push one button and you get the money the next morning. It's amazing. So if you have $25,000 you push one button you say I want to borrow $8,000. It'll show up in your account the next morning now the rates vary from 2.6.
23.3% and we give you a better rate the more money you have invested with us. Not the more money you borrow. So if you go to a traditional brokerage or bank, they give you more better rates for borrowing more money. We don't think that's a good incentive. We want to create an incentive for you to save more but the lowest rate is 2.6 percent. And so there's no paperwork literally no paperwork people who
you use this service can't believe that it exists.
Yeah, it's crazy because I have friends that you know, they're talking about well, I don't even know that they should be doing this but they could almost just refinance their car or pay off credit cards and just have a much better rate absolute. Am I missing nothing?
And by the way, there's no minimum payment monthly so the interest accrues and you can pay it all off at the end whenever you want to that's pretty awesome. It's almost too good to be true.
True. I know it feels like it. That's all the kind of searching for a question. I'm like, okay. What is my some kind of something? I'm missing here.
So the consistent theme is by implementing everything in software. We lower the cost and we share the savings with our client. What a novel idea you had the problem is financial institutions don't share.
Yeah. Well, it's great. It's a fantastic product and you know, I'm honored to be an investor as well, you know, maybe a few rounds ago and there were
Lee days, well the Andy thank you so much for being on the show. Obviously one last question. Have you written a book about any of these like entrepreneurial kind of principles or do you have your version of raid Aaliyah's book out
there now, I don't have the time between running the company and teaching at Stanford. I am flat out. So a lot of people have asked me to write about product Market fit that you have time. I'd love to but I just don't have the time. It
sounds like you're against
Again, so it's not going to happen. There
is why I blog a Blog about personal finance. So it's not about your career or advice about things like that, but we do blog about and actually what we do in our blog is very again, very counterintuitive. We offer data-driven actionable advice on Personal Finance. So if you read most personal finance blogs, they give you the
All rules of thumb but when you apply when you look at the data the rules of thumb actually seldom work. So we explore a bunch of misperceptions about personal finances.
Does that come in a newsletter as well? I'll know. It's just if
you go to blog dot wealthfront.com you find it that way. Okay, just if you just search for the wealthfront blog, we publish one or two posts every week. I'd love to see
that in a newsletter as well. That would be really cool. Does your stamp?
Course, is it online?
It isn't because it's a teach using the case method lectures when themselves much better to posting online and interactive session on a Case doesn't really translate very well to a post game.
You're killing me. All your good content is hidden.
Sorry
gotta do something. We got to get a book out of you at some point. Well, well Andy, thank you so much for being on the show. I really appreciate
it. Thank you so much for having me
all.
That is it for this episode one last friendly reminder head on over to Kevin rose.com there you can get all the show notes when you click on my podcast and also sign up for my newsletter once a month newsletter. I'm sure you'll enjoy it. That's it for now be well.
