Building Wealth with David Myszewski of Wealthfront

Speaker A: Hello and welcome back to Data Driven Finance brought to you by Yodlee. I'm Mike Stiles and my guest today is David Mischiefsky, who is vice president of product at Wealthfront, overseeing product development, consumer research and client support. Now, uh, fun fact. Dave spent 12 years at Apple contributing to the engineering team that was working on the very first iPhone. He, he's got a master's and bachelor's degree in computer science from Stanford. And today we've got some questions for him around wealth building access for young adults. So, Dave, we're glad you could be with us today.

Speaker B: Thank you. It's great to be here.

Speaker A: Well, first things first. Kind of give us a primer on Wealthfront. What does the company do? Who does it help?

Speaker B: Well, Wealthfront is a financial platform that uses technology to help young professionals turn their savings into long term wealth. Uh, we were among the first digital only financial solutions platforms and we pioneered using automation to offer low cost diversified portfolios. And since then we've expanded into adjacent, uh, financial products, including high yield cash accounts, stock investing, lending products and financial planning tools. So our mission is to help our clients grow their wealth and achieve their goals in a variety of economic conditions using automated, time tested, sophisticated financial strategies.

Speaker A: Well, what created these barriers for young professionals to begin with? What, what do the wealthy have that beginners just don't and how did they get it?

Speaker B: Well, the main barriers for young professionals to build wealth have historically been access and cost. Uh, traditional financial institutions often charge high fees and have high minimums such that it's not very accessible to the young people. And so in many cases you have a, uh, 1% asset under management fee. And then also the world of investing is very complex. There's a lot of jargon and there's a lot of choices that one can make and that really makes it hard for beginners to know where to start. And so young professionals do want to build wealth and manage their finances smartly, but they've historically been underserved by financial institutions.

Speaker A: And clearly you think of these financial institutions kind of have a role in educating them and kind of getting them up to speed, at least letting them not master the whole world of finance, but at least get them in a position where they understand what their money is doing.

Speaker B: That's right. And at, uh, Wealthfront, I think we really believe that we want people to get smarter about investing over time. And so, uh, we use automation and a digital experience to help people get started. And by offering financial products solely through a digital interface without using, um, humans in the Loop. We're able to bring the minimums down and the cost down, making it accessible. And yet we still have very sophisticated investing strategies that uh, a lot of the people who have more wealth are using.

Speaker A: And to that end, Wealthfront just rolled out something called NASDAQ 100 direct. What is that?

Speaker B: Well, we've been investing in direct indexing for quite a while. And NASDAQ 100 direct is a more tax efficient way for retail investors to invest in the popular NASDAQ 100 index. It's the first ever product to bring retail investors the tax benefits of direct indexing for the NASDAQ 100. So this is how it works. Instead of owning all of the companies that make up the NASDAQ 100 index through an ETF such as QQQ, uh, which is a very popular one, uh, this product makes it easy for investors to directly own the individual stocks that make up the index. And the direct ownership is really key because it creates opportunities for tax loss harvesting. For example, um, the NASDAQ 100 index might be up one day and perhaps 75 stocks are up, but 25 are down. Then what we can do is that the portfolio will sell some of the stocks that declined at a loss. And then come tax time, investors, uh, can use that uh, for uh, potential tax savings. And so the harvested losses offset capital gains. So we see a lot of people who are working for tech companies who, they've been compensated in RSUs. The RSUs have gone up a lot. And when they go to sell them to diversify, they have a lot of gains. And so what clients can do is use these losses to offset the gains, which saves them money on taxes. And then if you don't have capital gains, then you can offset $3,000 of ordinary income and you can roll over any excess to future years to save on taxes in the future. And so we make it really easy for people to get set up. And then in addition one can also do some customization on the index. So, uh, if you're working for a Mag7 company, for example, some of those companies make up a decent percentage of the NASDAQ 100. And so you can exclude those companies from trading, uh, so that you're not doubling down on the company that you work for. And then also we're really excited that the cost is low, just 12 basis points. So that's less than the expense ratio of any NASDAQ ETF currently on the market.

Speaker A: Yeah. What's fascinating about that is especially young investors probably are not factoring in tax Implications when they start investing.

Speaker B: That's right. A lot of times people are thinking about returns and uh, what we really believe is that uh, if we can make investing products simple, accessible, you know, we use fractional shares and then low fees. So if you say we really want to focus on the things that you can control, which is diversification, taxes and fees at the end of the day, uh, and that helps keep more money in the investors pockets over time.

Speaker A: Well, let me kind of ask you about uh, your personal journey because coming from Apple, working on a product like iPhone, were you always interested in finance and wealth building and that type of thing? Did you pursue the kind of role that you're in now or this is just something that kind of fell into your lap and you knew the ins and outs of product development.

Speaker B: It took a little while. So I was part of a small team at Apple that worked on the iPhone. And you know, eventually a couple years, uh, into that, I'd started getting some stock options and I uh, you know, back in those days we were in the office and we had phones, uh, in the office. And so we would get all of these cold calls from people in the financial industry wanting uh, to talk to us. And eventually I decided, okay, I'll pick up one of these calls, I have some questions. And so I met with a financial advisor, had a really terrific conversation. I thought this guy was very, very smart. And then at the end of the conversation he says, well, unfortunately this is the last conversation I can have with you because I only serve people who have a half a million dollars or more. And so after that conversation I decided, okay, I guess if, uh, they're not going to help me, I'll help myself. So I read a lot of books, the classics of Benjamin Graham, et cetera, and spent uh, a lot of time learning how to do it. And so I invested on my own. And then after some time had passed I uh, ultimately the light bulb clicked that the process of figuring out what to do was quite difficult and not one that I would expect most people to take. Uh, but actually doing it seemed like something that could be automated. Uh, and so I was wondering, why haven't I heard of any software company doing this? And turns out there was one I just hadn't yet heard of, Wealthfront. And so I eventually, after uh, being very interested in personal finance in my own personal life and spending a lot of my free time on it, I decided, well, what if I did that as part of my day job, not just as part of a side hobby? And that's when I found Wealthfront, uh,

Speaker A: and here you are. Obviously it's a very cool thing that you saw. You were there to witness the development of the iPhone. I can't imagine a piece of hardware that has changed our society and lives more than that one did. Now here you are managing product at Wealthfront. What lessons with regards to do's and don'ts did you bring to Wealthfront from that Apple experience?

Speaker B: Yeah, I think there's a few different, um, areas. So I think first is that the impact of a small, talented team and how quickly a small team can move as long as they are all a players with high standards, uh, and that can really move quickly and really uh, magnify any success that you have. I, um, remember even going into the fourth iPhone, uh, there were some teams that were literally one person and that was the team, uh, building a pretty core piece of technology. And we were always very judicious about how we hired and who we hired. And so I've kind of uh, taken that here. I think one of the comments that I frequently get from product managers interested in joining is they expected that our team would be about four or five times the size that it actually is. And so we really just want to have a great set of talent who is uh, going to drive outsized outcomes over time. That's sort of one lesson. I think the second is the importance of creating your own, uh, technology to deliver the best, best user experience possible. I think one very, uh, important thing to me when I was initially talking to Wealthfront was that Wealthfront was in the process of building its own banking and brokerage platform. And what I had seen over the years at Apple is that there were a number of vendors that were very good at what they did and we were very happy with them. But a lot of times when we wanted to innovate and do the things that nobody had ever done before, we, we really needed to push the envelope. And a lot of times that meant we had to build our own technology to do that. And so at Wealthfront I was very excited that we were working on, uh, that we had such a technical focus and we weren't going to dilute the product by getting humans in the loop and having some hybrid where you do some things with technology and some things not. We really were religious about building the core uh, infrastructure and I think we've been realizing the benefits of that because technology compounds. So once you have built the underlying technological platform, uh, you can often use those capabilities for a variety of different things. I think we see this, uh, at Apple, you know, where they'll use a chip on not just one product, but multiple products. Um, we see the same thing with our technology as well, that when we build an infrastructure, we can bring some of the infrastructure to create a variety of compelling products. And so I think having that control over the infrastructure is very important.

Speaker A: Well, kind of in that same line of questioning, I mean, product development, customer support, consumer research, all of that is under your umbrella. That feels like a lot. You just said your team is kind of small. It's different silos, totally different areas in a lot of companies. Why does Wealthfront kind of put all those things together under you?

Speaker B: Yeah, well, our mission is really rooted at driving improved financial outcomes for clients, so that our clients are at the center of all of our product decisions. We're always learning from them. We're always looking at both qualitative and quantitative data. And every single week we're, uh, talking to customers. I'm listening to interviews that we've done over the week. Um, and we're thinking about things from a variety of different altitudes, uh, what's going on in the market and how people are thinking about it. Um, how are we bringing our category of products forward, uh, as well as some of the detailed implementation choices that we make around the user interface. Uh, and so if we're thinking about the data from a variety of standpoints, it helps us make better decisions. And I think one role that is very important in all of this is our customer support team. Uh, so they're on the first line, hearing the things that clients are asking for. And, uh, we've used that feedback to build better technology and better products to improve our scale. So, for instance, back in 2013, we had 4,000 clients per product support representative. And now that's at 55,000 clients. Uh, and similarly, it was $251 million of assets in 2013, and now it's over $3.7 billion today. And so, uh, we can only get that scale by having a good feedback loop between sort of the clients and the product and looking at a variety of different, uh, angles and then having the religion to automate as many customer inquiries as possible. So if they reach out, if they have a question, we want to figure out how to create a better version of the product so that they don't have that question, or so that the question is answered in the product.

Speaker A: Well, getting back to Wealthfront's products and how it does what it does, if I'm a young professional, and, wow, are those days well behind Me, uh, what are the components to wealth building that I need? And how does Wealthfront kind of approach each of those?

Speaker B: Yeah, our product philosophy really boils down to helping clients focus on the things they can control. So those are taxes, fees, and risk. So you can't control the market or what securities are going to do today or how people are going to react to it. Um, but you can invest intelligently with a broad set of assets and in a way that makes sure that you're keeping more of your most money, not just, uh, focusing on the returns, but the after tax returns adjusted for risk. Uh, and so we focus on taxes, fees and risk, um, because they're just so much outside of their control. And those are the things that are most in their control. And we really want people to build good habits through regular investing, regular, uh, deposits. And so we have a lot of automation tools to help people make regular contributions to their investments. Uh, and then once the investments are made, we spend a lot of time finding ways to help our clients optimize their taxes, uh, so that they get to keep more. Uh, so we think it's very important to, uh, have features like tax loss harvesting as part of an investing strategy. And I think, unlike many in the industry, we publish our tax loss harvesting results every year. Uh, and we estimate that we've saved our clients over a billion dollars in taxes over the last decade. So this is just a very compelling way to invest.

Speaker A: You kind of touched on it, uh, a minute ago, but give me some examples or, uh, an example of, here's what we learned through research and by watching usage, and then here's how we applied that to the product's design.

Speaker B: Yeah, I can give you an example where we use both qualitative and quantitative data to make a really good set, a really good decision. So a great example of this is the cash account. Uh, we originally offered the ability to link your accounts so that you can see your entire net worth picture how much you have at your bank account, how much you have in your brokerages, your 401k in addition to the Wealthfront accounts. And we noticed a very curious thing when we were looking at the data, which is that our clients, while they had a lot invested in Wealthfront, they also had a ton of cash sitting around. And in fact, the cash was earning next to nothing in their accounts. So we thought that if we could help our clients earn a higher yield, uh, safely, they would want that. Uh, and having recently built our own banking and brokerage platform at the time, uh, now we could sweep the funds to FDIC insured program banks, um, uh, to help them earn a better yield. And one thing that we found curious was that while the clients were not earning much interest on their cash, in a lot of cases they could have opened a money market fund or another account at the institution that they held their cash, uh, to earn that yield. And so we thought that we would need to build something even more compelling so that they would, uh, be motivated to change. So we built a lot of automation functionality into a UI prototype, uh, where we moved your money all over the place. You know, we kept enough for your bills, for cash, we automatically invested it. And clients didn't really react to that well initially. So then when we kept probing as to what about that prototype did they like? Uh, they kept coming back to the yield and the FDIC insurance. And so then what we did is we stripped away almost all of the complexity such that clients would have a good yield, FDIC insurance, and in an account that sits alongside you're investing and is super easy to open. And people really loved it. And so then we built that version of the product which was dramatically simpler and it really resonated with clients we had when we launched it. It was the biggest net deposit day in our company's uh, history. And I think three takeaways, uh, that I would have from that, in addition to obviously focusing on qualitative and quantitative data is a lot of times if you see what clients are doing and understand what they're doing, you can oftentimes take that and build a better version of what they're doing. Uh, the second is just the importance of getting feedback. Getting the feedback and then changing what we were doing in response to the feedback led to a lot faster success. And then a lot of times counterintuitively simplifying, uh, the product actually makes it more valuable, not less. I think too often people want to build all the bells and whistles into the first version of the product. And what tends to happen is that the core value proposition gets lost in the shuffle. And so it's oftentimes better to simplify and find one big compelling value proposition and put everything into that.

Speaker A: Well, I learned from my own research that Wealthfront kind of thinks a lot about product market fit. You talk a lot about that. And I've seen, uh, so many companies neglect user experience for short term business goals. How do you align really happy customers with the big business performance that stakeholders want to see and want to see immediately? Like, what does success look like as

Speaker B: Wealthfront defines it one way that we've structured our business is so that we have a very client friendly business model. We make, uh, money based on assets under management from our clients, so as they grow their wealth, we make more money. And so that means that from the business standpoint, we are always incentivized to help our clients grow their wealth. This is very different from some institutions that make a lot of money on transaction fees. Uh, and so, you know, we're not waking up in the morning thinking about how can we get our clients to do more transactions regardless of whether or not it's good for them. Uh, we're thinking about how can we help our clients build more wealth, uh, and uh, save more on taxes every single day. So, you know, we don't have expensive human advisors, we don't have transaction fees, we don't hide our fees. Uh, we just earn the revenue based on the client's assets. So that keeps us really aligned. And then once we ship products, we obviously care a lot about how they adopt them and in particular who adopts them. So we've seen that clients, when they adopted cash, uh, will move money around a fair amount. And one of the observations that we had, which I think is counterintuitive to a lot of people, is that if we can actually make it easier for clients to get money out of the account, they're more likely to keep money in the account. A feature like instant withdrawals seems a little crazy for an asset under management, for a business that makes money on assets under management, because now you're making it really easy to get money out and you're not making money on that anymore. But what we actually find is having the confidence that Wealthfront will move money quickly and conveniently makes people love the account more. It actually motivates people to keep more money in the account over time. And so we're happy if they're using features that get money out, if they're paying their taxes through the Wealthfront cash account. And we get excited about that. And then I think the other thing that we care a lot about is organic growth. People who are delighted by a product just can't wait to share it with others. And so we really want to create a product that has a compelling value proposition and has moments of delight so that when people experience the product, uh, they just can't wait to tell it, tell about it to their friends. So we see about half of our clients come from a referral. And then once they have a product that they love, our clients don't stop there. They ask for More. And I think that's ah, also an important sign of clients who are asking for more. And then you build that more, they will ask for more. And it's a great virtuous cycle where they're constantly raising the bar for us and then we're raising the bar and then they raise the bar again. And it creates a really great product experience over time if you uh, can address more and more of their needs over time.

Speaker A: So obviously a show like ours, you know, we've talked to a lot of fintech companies and the thing that lives at the foundation of all of them is data. What's your big picture view of how you guys access, accumulate, store and leverage data?

Speaker B: Yeah, so there shouldn't ever be a week that goes by where you don't talk to customers or look at data, uh, from customers. I think things can change more quickly than you imagine. And we're looking at quantitative data all the time about how like who is using the products, how they're using them. And one thing that we found in the past couple of years, which uh, was a little bit of a surprise, is just how quickly Gen Z clients were using our platform. I think we've historically millennials have been our largest demographic and it still is, but what we observed was a rate of change, growth in terms of Gen Z clients. And the great thing is when the rate of change goes up a lot, it doesn't take that long for the magnitude to be compelling. And so I'm oftentimes looking at rate, ah, of change, not just the magnitude, because rate of change oftentimes represents an opportunity. And sometimes, and when that happens and you didn't do anything, that's also really interesting, uh, and oftentimes interesting to dig into. And then I think the other thing that we're seeing is that Gen Z is using more automation features as well. And we've been investing a lot in a lot of automation over the years. So things like our automated savings plan where you can tell us to keep a certain amount of money in your cash account and then once it gets to a certain threshold you can invest the excess. Features like that are even more compelling to Gen Z than they are to the older generations. And so having a beat on uh, what's changing in the data oftentimes really

Speaker A: helps to get a complete, as complete as possible, a picture of your customer. Are you happy with the level of connectivity in terms of being able to get data about them from say, their other financial institutions? Are you happy with the level of connected banking or do you Think there's a long way to go there.

Speaker B: I think there's a little bit of both there. I ultimately believe that it's, uh, the consumer's data. And what we're trying to do is to access, uh, give consumers ways to look at the data and then we can use that data to better serve them. And I think there are some places where that connectivity works extraordinarily well and is very fast.

Speaker A: What are Wealthfront's current challenges? For example, every company that exists is grappling with technological change that's just coming at them fast, faster, faster than ever. You mentioned how being small helps you stay agile, but how are you coping with the speed of change?

Speaker B: One of the persistent challenges that we have is we're focused on good, uh, behaviors that are consistent over the long term, which is a lot like telling people to eat their vegetables. Um, so there's a lot of financial, uh, services out there that are really evangelizing different ways to get rich quickly, uh, or gamifying investing. And I think we're really focused on tried and true behaviors and consistency in a plan. You know, that that's always hard, uh, to sell people on relative to the, hey, this thing went, this stock went up by 20% last month. And so I think we're just really focused on how do we help people realize and execute a good process and then over the long term things will work, uh, out. Now our industry is rapidly evolving. It's very competitive industry. There's a lot more innovation happening now than what there were 10 years ago. And there are a lot of companies that are, uh, launching new products and services. And we really focus on how do we automate more of what we're doing and how do we reduce the amount of work that it will take us to build the next product or service. And what we've seen over the past few years is our rate of change has gone up. We've been shipping new products faster. And the platform investments that we've made have enabled us to ship, uh, different types of products, um, that are different but are able to use the same underlying technology. Uh, and then we're continually trying to find ways to, uh, improve on clients taxes. And the one thing that is tough to earn over a short period of time is trust. And you know, we have always had our clients best interest at heart. And I think we, we have been building client trust over a long period of time. M. And I think that's something that is really tough to build but easy to lose. I think there's the old saying that trust arrives on foot but departs on horseback. And I think that's, that's very true. And so we are constantly trying to earn more and more trust from our clients.

Speaker A: Well, I am really intrigued with your target market. And because you've been watching them, you know a lot about them. You talked a bit about how Gen Z likes to use your product or prefers to do their banking business. But so much of what we read is how different things are for, say, Gen Z than it was when I was starting my career out. It feels like their wealth building challenges are maybe greater than what I had. So what are your thoughts about that and young people's prospects overall when it comes to investing and wealth building?

Speaker B: Yeah, I think there are a few different dimensions to that. Uh, so I think millennials, uh, oftentimes took a beating for eating avocado toast and having their daily latte. And those are never things that are going to lead to better wealth or worse wealth, uh, as long as it stays within a budget. I think a lot of people doubted that millennials would be doing well and overcoming the effects of the Great Recession. But what we've seen over the years is the Millennials are, it's a large generation and it's rapidly been growing wealth. I think the same thing will be true of Gen Z. I think they're coming of age in a little bit of a tough job market and housing market. But I think they'll be able to overcome that over time. And what I'm encouraged by is that Gen Z has been opening, uh, investment accounts earlier than other generations. And I think millennials also open investing accounts earlier than the prior generations. And there's just so much information out there which can be both a strength and a weakness. There's a lot of really great financial advice that's, uh, on various platforms, but there's also a lot of cruft. And so the good news is they have access to the advice, but they have to be very judicious about who they trust and what types of advice that they take. And so that's a, that's a different challenge than sort of what I had 15 years ago, where the great information was in books and there wasn't really a lot online that you could read. I think broadly speaking, from wealth runs position, Gen Z and Millennials are in their accumulation phase. They're continuing to learn in their jobs, get promoted, adapting to a world with very rapid change, and they'll be building more wealth over time. Uh, and I think, uh, when they're when they're ready at different points, we'll be there for them. So if they have saved money and they want to earn a little bit more yield, we have a cash account. If they are ready to invest, uh, we have a variety of different investing options that can serve different needs. And as long as they focus on saving and investing regularly, I think they'll be just fine.

Speaker A: Yep, sounds like Wealthfront is focused on helping them do that and get going. So, Dave, thanks again for being a guest on our, uh, little show here. If listeners want to find out more about you or Wealthfront, how can they do that?

Speaker B: Thanks. You can find us on our website@wealthfront.com or the App Store. We're also on LinkedIn, Instagram, other social media channels. Um, I'm also on LinkedIn and I post, uh, every once in a while.

Speaker A: Great. Well, we'll put those links in the show notes as well. And for our listeners, this may come as a shock, but not all podcasts are worth your time. Uh, so hopefully we've shown you that this one is. So go ahead and subscribe. And if you want to see how aggregated financial data might be of great use in your business, visit resources.yodlee.com podcasts. We'll see you next time on Data Driven Finance.