Betterment, the New York-based company that provides algorithm-based personal investment services, is riding the coattails of digital transformation in financial services. In a highly competitive space with behemoth money managers like Vanguard and Charles Schwab, this startup founded in 2008 has managed to find its foothold as the largest independent “robo-advisor.”
By offering individuals a low-cost way to invest and manage their portfolios online, the company has accumulated over 210,000 customers. Their $7 billion in assets under management still represent only a small fraction of the overall market, but also a 120% increase over 2016. Last year, Betterment was the fastest growing firm on the FT’s list of top Registered Investment Advisors in the US.
So what’s in their secret sauce?
For one, a firm belief that passive investing is the best way for most people to put their savings to work. The argument goes that an average individual will not be able to beat the market consistently and is better off finding efficient ways to invest in broad indexes. They should focus on defining a target return, diversifying appropriately, and minimizing fees and taxes. Betterment is far from alone in this view, as even famous stock picker Warren Buffet has suggested his estate will be invested passively.
Next, the technology to democratize investing services. Betterment offers a purely automated portfolio of low-cost ETFs for a fee 25bps of managed assets per year. After setting up their profiles and defining their target rates of return, customers can lean back and let the algorithms harvest tax losses, reinvest dividends and rebalance efficiently. By creating intuitive online interfaces and automating basic investing best practices, robo-advisors are able to serve additional individuals at minimal variable cost.
Thirdly, Betterment has an important advantage in its appeal to a young customer base. Banks and traditional financial institutions are among the brands least trusted by millennials. These digital natives also feel increasingly comfortable transacting online. They are willing to trust technology companies that demonstrate their value and act transparently. Fintech companies have an opportunity to capitalize on this demographic and Betterment has done just that.
This is not to diminish the challenges ahead. The competition is wide-awake. Asset managers fear fintech startups more than existing large incumbents and financial services executives see online investment firms as the most disruptive fintech threat in the upcoming year. Vanguard and Charles Schwab have launched their own robo-advisory products, which quickly surpassed independents such as Betterment and Wealthfront in AUM.
Betterment’s adoption also seems to have been hindered somewhat by the complete lack of human interaction offered to customers. Living, breathing money managers may not always justify their higher fees, but many people are hesitant to invest their assets without being able to talk it through. Vanguard and Charles Schwab have been successful with “hybrid” robo-advisory services, combining the benefits of algorithms with the ability talk to a human advisor. Betterment is following suit and now offers an annual phone consultation for an additional 15bps, or unlimited consultations for and additional 25bps.
What began as a fully-automated, low-end disruption to asset managers and RIAs, is now moving up-market appeal to a broader base. That includes more affluent customers and business looking to provide retirement benefits. Investors seem to like the story; Betterment was valued at $700m in its Series E round. The company may still be evolving – and the optimal level of automation may still be unclear – but Betterment has already proven that there is a place for tech-enabled solutions in wealth management.
 WSJ – 2/2017 – Robo-Advisory Firm Adds the Human Touch
 Dow Jones – 12/2016 – Betterment’s ‘Robo’ 401(k) Signs Up 300 Companies
 PR Newswire – 6/2016 – Betterment Is the Fastest-Growing Firm in the 2016 Financial Times List of 300 Top Registered Investment Advisers
 REGP – 5/2016 – Funding for Venture Capital-Backed Fintech Startups Is Poised to Hit a Record in 2016
 WSJ – 3/2016 – Robo Adviser Gets Pricey Funding — Betterment’s valuation of $700 million is 40% higher than it was in 2015
 Penton Insight – 3/2016 – Robo-Adviser Betterment Sees $700 Million Valuation After New Round of Funding
 UPSBJO – 3/2016 – Betterment CEO: Fidelity and Schwab’s entering our turf is a positive
 www.barrons.com/articles/robo-advisors-take-on-wall-street-1432349473 [image source]