The amount of vitriol expressed by brokers, financial advisors and even planners toward Wealthfront’s recent risk-parity fund offering is nothing new — a number of its announcements have attracted harsh industry scrutiny.

And Wealthfront is hardly alone; critics have hammered competitor Betterment and many other wealth management startups for how they've handled market downturns, for instance. But such criticism manages to gloss over the fact that while these firms are not going to turn away well-heeled investors, they were created to service the younger, smaller clients that most advisors still do not serve nor want.

I worked at Wealthfront between 2013 and 2015 as an editor overseeing its content efforts and I still have some Wealthfront stock. I was a trade technology reporter and columnist for years before that. One big reason why I headed to Silicon Valley was the opportunity to help the masses falling through the advice gap. Escaping the glacial pace of advisor and brokerage technology development was a plus too.

Only after leaving the advisor tech startup scene and in turn spending time as an industry analyst that I’ve come to fully recognize what drives much of the animus I mentioned above: frustration, envy, and fear.

Wealthfront CEO Andy Rachleff said in hindsight, the risk parity fund should have been at a lower cost to begin with.

These emotions are simmering below the criticism over investing approach and cynicism about what a future downmarket holds for the clients of these startups. The righteous indignation can be paraphrased like this: How dare these startups — newbies and outsiders — come in and shake up our industry with inviting design, simple onboarding and digital innovation or inconceivably low pricing?

I have witnessed firsthand just how hobbled and siloed many of the big incumbents are. I’m sure many financial advisors can relate to this, not only those that might have been captive brokers or bank advisors but also RIAs who have dealt only with the big bureaucracies and slow tech evolution of their custodians.

The size and scope of these firms, most of them big corporate conglomerations with a plethora of business lines vying for resources, makes it inherently difficult to be nimble. As an industry analyst I could feel the frustration during interactions with digital strategy executives charged with setting the annual development agendas for their companies.

They fully recognized the need to embrace the high-earning-not-rich-yet set (HENRYs as they refer to them). Unfortunately, most of these executives could only manage a modest, partial buy-in from those in the C-suite. I believe that is why, after a few years, we have yet to see any of the big banks touting the AUM they have raked in after having launched either a home-grown or robo partnership.

The role AUM has just muddies things further. While it is true this is a race for Betterment and Wealthfront — both need to hit profitability before their funding runs out and it becomes prohibitively expensive to raise new money — they are not directly in an assets race with Vanguard or Schwab. In fact Vanguard acknowledged that 90% of the $101 billion in Vanguard Personal Advisor Services AUM had come from preexisting clients, not net new assets.

Schwab, which has $25 billion in AUM among its three related digital offerings, has never broken down publically how much of those assets are from new versus existing clients.

I would argue that things look a little more competitive when you compare the $10 billion in organic AUM brought into Vanguard’s hybrid Personal Adviser Services offering with the $13 billion and $10.5 billion, all of it from organic growth, held by Betterment and Wealthfront respectively. Add to this the double- to triple- digit year-over-year growth rates in number of accounts at each of the startups over the last two years and the situation looks even better for the upstarts.

It is important to keep in mind that the risk parity fund is just the latest feature developed for those sophisticated, fairly well-off Wealthfront clients that have a taxable account with more than $100,000. I’m not privy to how many such clients the company has, but just like any other investment management company, it has to do what it can to improve its premium offerings. Emulating, in automated fashion, something that has already been successful elsewhere and doing so at lower cost simply makes sense.

(Even though clients had the option of opting out of the fund, it's clear Wealthfront could have better communicated the offering. Still, in the end it responded to criticism by lowering the fund's cost. Schwab on the other hand won't change the cash allocations it puts its digital advice clients into, despite the criticism it has received for doing so.)

It will be a shame for the rest of the industry if Wealthfront, Betterment, Acorns, Wealthsimple, Wisebanyan, Stash Invest, CinchFinancial and other fintech startups were to become extinct (some of them surely will, others will be acquired).

I say this because these little companies have served as the only engines of real innovation in the wealth management services industry. They are also attempting to address unmet needs efficiently and cost-effectively, not directly competing with most advisors.

Let’s not forget it is fear of these little companies getting big that inspired that most sincere form of flattery — imitation — by the likes of Schwab and Vanguard (and then a cascade of others) to offer up digital advice in the first place. Without them, would the industry ever have embraced this technology? Would it even be in a position to potentially repel the possible entry of new competitors from outside wealth management?

Fiduciary advisors and planners should be far more concerned with the more meat-and-potatoes offerings like Wealthfront’s Path, the baked-in artificial intelligence and personalization of CinchFinancial or the ongoing evolution of the free toolset at Personal Capital (yes, it's clickbait for the RIA side of the business, but it is a good set of financial planning tools).

Track these offerings more closely, see how they are evolving the features they are rolling out and push your own third-party providers and custodians to keep pace and follow suit.

Davis Janowski

Davis Janowski

Davis Janowski is an independent fintech consultant.