{"id":5124,"date":"2015-05-05T14:17:30","date_gmt":"2015-05-05T21:17:30","guid":{"rendered":"http:\/\/www.wealthfront.com/blog\/?p=5124"},"modified":"2022-01-11T17:12:34","modified_gmt":"2022-01-12T01:12:34","slug":"software-based-companies-judged-rate-innovation","status":"publish","type":"post","link":"https:\/\/www.wealthfront.com/blog\/software-based-companies-judged-rate-innovation\/","title":{"rendered":"Software Based Companies Should Be Judged On Their Rate Of Innovation"},"content":{"rendered":"

Software is eating the world and it\u2019s pretty clear why. Unlike their people-intensive predecessors, software-based businesses have the ability to improve their offerings at a rapid rate.<\/p>\n

But software is not a commodity, and not all companies are able to innovate at the same rate. Understanding that matters, because committing to a software-based vendor that is not the innovator in its space will likely lead a customer to incur significant costs in the form of lost opportunity \u2013 and that opportunity cost is usually quite tangible.<\/p>\n

Not All Automated Investment Services Innovate At The Same Rate<\/strong><\/p>\n

Allow me to illustrate this with automated investment services. To the uninformed observer, all the players appear to offer the same service \u2013 a diversified portfolio of low cost index funds managed by software. Dig deeper, however, and you will find some significant differences, particularly around the rate at which different automated investment services improve their offerings.<\/p>\n

Wealthfront launched its service in December 2011, one and a half years after the first entrant. Despite our late start we were able to grow into the largest player in our space by consistently being the first company to offer what ultimately became industry standard services. The timeline below displays when Wealthfront began to offer a new capability and how long it was available before one of our competitors launched something similar:<\/p>\n

\"\"<\/p>\n

The Value of Innovation Adds Up<\/strong><\/p>\n

Prior to our entry, the biggest player in our space charged an annual advisory fee of 0.90%. This seemed crazy to us given that a software-based solution could be offered at an extremely low marginal cost. As a result we launched with a 0.25% annual advisory fee. As you can see our competitor responded within three months. A client who chose our competitor would have incurred an extra 0.16% fee for that year ((0.90 \u2013 0.25%) * 3\/12).<\/p>\n

In October 2012, we became the first automated investment service to offer tax-loss harvesting<\/a>. It took our competitors 20 months to come up with an alternative.<\/p>\n

In March 2013, we became the first automated investment service to offer what is commonly known as optimized asset location<\/a>. It looks at your portfolios across both taxable and retirement accounts and puts the least tax-efficient assets into the tax-protected retirement accounts. Our competitors didn\u2019t offer this capability until June 2014, 15 months later.<\/p>\n

In December 2013 we launched our Stock-level Tax-Loss Harvesting<\/a> service. It allowed people other than private wealth management clients to access tax-loss harvesting within an index<\/em> for the first time. No automated investment service has been able to replicate what we do even after 18 months.<\/p>\n

Finally, in January 2015 we introduced tax minimized brokerage account transfers<\/a>. This new capability allows our clients to minimize the taxes due if they transfer their current holdings at another brokerage firm to us rather than sell everything and transfer cash. We have not seen any other automated investment service offer this capability.<\/p>\n

The cumulative benefit of these advances is significant.  There is a wealth of additional improvements in the pipeline that we look forward to introducing in the coming months.<\/p>\n

Software Based Market Leaders Are The Innovators<\/strong><\/p>\n

But really, in this framework, Wealthfront is no different than any other software based market leader. As I explained in When It Comes to Market Leadership, Be the Gorilla<\/a>, the leader is almost always the innovator in its space, because there is a virtuous circle of innovation. As you lead the market, your customers do better. As your customers do better, you attract a bigger market share. As you get a bigger market share, you attract better talent and raise money more easily. As you attract talent and raise money, you can continue to accelerate your pace of innovation.<\/p>\n

You\u2019ve seen this in popular companies like Amazon. Amazon was the first to sell books on line. Barnes & Noble followed Amazon into the market with great fanfare, but Amazon\u2019s market-leading position allowed it to invest in continual improvements and innovations that both saved people money and added convenience: reviews. recommendation engine, next day shipping, additional categories, Kindle, Prime. The list keeps growing. Today, it has a truly dominant position.<\/p>\n

Rate Of Innovation Should Drive Your Decision<\/strong><\/p>\n

Pundits and market analysts often ignore the role of innovation because they are used to evaluating people-intensive business where execution, not innovation, plays the biggest role in differentiation. Software-based businesses need to be evaluated very differently from traditional businesses. Choosing the innovator means you are likely to continue to be rewarded with incremental benefit for many years to come.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Software is eating the world and it\u2019s pretty clear why. Unlike their people-intensive predecessors, software-based businesses have the ability to improve their offerings at a rapid rate. But software is not a commodity, and not all companies are able to innovate at the same rate. Understanding that matters, because committing to a software-based vendor that […]<\/p>\n","protected":false},"author":4,"featured_media":7281,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1315],"tags":[2095,2096,2097,2098,2099,2100],"coauthors":[99],"class_list":["post-5124","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-industry-insights","tag-choosing-between-software-based-companies","tag-innovation-timeline","tag-product-innovation","tag-rate-of-innovation","tag-software-based-company","tag-value-of-innovation"],"acf":[],"yoast_head":"\nHow To Judge Software Companies | Wealthfront<\/title>\n<meta name=\"description\" content=\"Not all automated investment services innovate at the same rate. 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