Wealthfront continues to add new features to its purely digital advice software in an effort to attract new assets and prove its value to consumers.
CEO Andy Rachleff took to Wealthfront’s blog on Wednesday to announce that the robo advisor would now offer personal. Users with at least $100,000 invested at Wealthfront can establish a line of credit of up to 30 percent of the account value. Rachleff said it takes 30 seconds to sign up, accounts are instantly approved without paperwork and people get their money as quickly as 24 hours later. Interest rates range from 3.25 percent to 4.5 percent.
[Editor’s note: Wealthfront said it was offering the loans in partnership with RBC Capital. An RBC spokesperson later clarified that Wealthfront is a client of RBC Correspondent Services, which provides custody and clearing services for Wealthfront, but is not party to the loans.]
Wealthfront calls the service Portfolio Lines of Credit and said it’s faster than a home equity line of credit. It also doesn’t come with the tax hit of withdrawing from an investment account.
“We live in a world of ‘instant deliver,’ from taxis to groceries to handymen. So why not add lines of credit to the mix?” Rachleff wrote in the blog. “At Wealthfront we want our clients to be able to borrow what they need, when they need it, directly from their smartphones.”
The line of credit is secured by the user’s own investments which allows Wealthfront to offer better interest rates and more flexible repayment schedules than traditional lenders. These types of loans, known as securities-based loans (SBLs), are increasingly marketed towards wealthy investors looking to buy big assets like a new home.
According to The New York Post, financial experts are increasingly worried about the popularity of SBLs. While attractive during a time of unprecedented stock market highs and growing interest rates, it could leave borrowers exposed if the markets crash. Some criticized Wealthfront on social media.
And now the robos want in on it... https://t.co/yZn7w19i4i ht @macrodidact
— Jesse Felder (@jessefelder) April 19, 2017
So the Robo advisors like @Wealthfront are against active investing but now for for lending and leverage. Fail. https://t.co/HVdV1Eiw9h
— howardlindzon (@howardlindzon) April 19, 2017
A Wealthfront spokesperson said the company aimed to minimize such risks by being conservative and capping the loans at 30 percent of portfolio value, as opposed to other SBLs that allow borrowers to take out 50 percent to 70 percent of their portfolio value.
Loans also cannot be used to buy more securities on Wealthfront, and any additional money deposited into a Wealthfront account goes toward paying back the loan. To keep clients invested for the long term, dividends from a brokerage account aren’t allowed to repay the loan.
Portfolio Lines of Credit is the latest in a string of new features introduced at Wealthfront since Rachleff reclaimed his role as CEO in November. The Redwood City, Calif.-based company launched Selling Plan in January to help employees in Silicon Valley sell stock they receive from an IPO. In February, Wealthfront rolled out an automated financial planning tool.
The spokesperson attributed the innovation rate to a “significant investment” the company made to its infrastructure in 2016, which was necessary to remain a fully software-based company.
“No one else in this space has made this type of infrastructure rebuild investment because software is supplemental to their strategy, not core,” the spokesperson said in an email. “[Our competitors] are all still building off of the antiquated systems of financial services. Charles Schwab and the like, and the startups in our space like Betterment, cannot see a world where we do not partner with the old way of doing things and use human advisors.”
Though many have said the so-called robo-hybrid model of supplementing human advice with automated technology is the way forward for the industry, Wealthfront says its success is proof that the digital-only, direct-to-consumer robo model isn’t dead yet. The company added $1.3 billion assets under management since January and now manages a total of $6 billion.