I’ve been interested in online advisor/asset manager Betterment for a while now, and even invest a small part of my vast fortune through them. The company is supposed to disrupt the traditional financial advisor model—in fact it launched at the TechCrunch Disrupt tech conference in 2010. See: After outcry, Betterment 86’s (but not on purpose) a blog post inflaming advisors.
And I have to say, Betterment’s goals-based investing service is kind of impressive. See: Online RIAs will mostly fail — and here are 10 reasons why. You transfer money in via a linked checking account (there’s no minimum), enter a financial goal and time frame, calibrate your risk level using a slider, and your money is invested in stock and bond portfolios composed of ETFs. You can see your progress whenever you want, and taking money out is fast and simple. Not that I’d do that with my investments.
But interviewing founder, CEO and whippersnapper Jon Stein (he’s 34), I found him to be strangely diplomatic about human advisors. See: A departing NestWise advisor tells what he learned from the whole experience.
Not only did he decline to liken readers like you to the travel agents of 20 years ago, but he refused to take my bait and sound off on their fees. This from a guy whose company charges as little as 15 basis points for asset allocation and fund selection.
It turns out Stein, whose New York-based firm has gathered 24,000 customers and more than $300 million of assets in three and a half years, has visions of symbiosis. He’s engaged in the beginnings of a partnership outreach to the advisor community.
As you’ll read, Stein was more animated when we asked him how Betterment stacks up against online competitor Wealthfront. See: Wealthfront raises a cool $20 million from VCs to pursue a big slice of a $1 trillion market also learned that his asset target for Betterment is a hefty $100 billion in five to seven years (note to self, check back with him then). And we posed the question no executive at a young technology company wants to hear: Are you profitable?
Steve Garmhausen: Tell us about your business.
Jon Stein: A lot of investment advisors have minimums of a million or more. There are a lot of people out there who just want that simple asset allocation service who don’t meet that minimum.
We say that we have the best way to invest for anyone with $10,000 to $10 million. We’ll recommend a portfolio optimized for your goals—you can have multiple different goals set up on our accounts—it’s goal-based investing. For each goal we’ll recommend an optimal asset allocation, tell you how much to invest for it, so there’s advice about how much you need to save, and we’ll let you know if you’re on track to reach that goal or not and what you need to do if you’re not on track. See: Online RIAs will mostly fail — and here are 10 reasons why.
And then we automate a lot of the important things that most people wouldn’t take care of it they were left to their own devices—things like automatic rebalancing, automatic reinvestment of dividends. And we do those things in extremely tax-efficient ways; in essence we optimize our investment portfolio for net-of-tax, net-of-fees and net-of-risk best possible returns for each accountholder.
SG: Why do you think there’s a place in the market for online investing firms like Betterment?
JS: Technology has now moved to the point where investing itself is better served by technology. And as a result, for those customers who just want the most efficient investment portfolio possible, going direct to a Betterment may make a lot of sense. And for those customers who want a little more hand holding or want sort of regular conversation, then maybe a more traditional investment advisor makes sense. I think it’s likely, if not certain, that firms like ours will coexist with human advisors for decades, if not longer, to come. I don’t see us as replacing the advisor industry. See: Five ways that big, savvy RIAs are winning clients online.
I do see though that there’s this growing segment of people who are comfortable doing just everything online. They buy everything online at Amazon, they listen to all their music online instead of buying physical things. People are more and more comfortable with that, and investment management is one of those things that happen to be able to be managed very well online.
SG: Do you think the human advisor community has grasped the fact that asset allocation and stock selection have become commodities?
JS: I do think increasingly they’re aware of that. Nothing happens overnight in any industry and technology is continuing to improve. It’s not as though 10 years ago the technology wasn’t there to make this kind of product available. ETFs were still in their infancy, for instance. ETFs are a necessary piece of what we do, and of course advisors are taking advantage of ETFs too. They’re a great product. But with them and with the improvement in web technology and with the improvement in the scalability of applications and so on, we’re able now to deliver this kind of investment optimization, more efficiently than I think it ever has been before. See: Windhaven’s success draws attention to emerging ETF managers.
SG: If advisors have grasped that asset allocation and investment selection have become commodities, I don’t see that reflected in their rate structure. It’s still pretty much 1%.
JS: I think a lot of advisors are doing more than just recommending investments. I think the good ones are certainly doing more than that. And I think that the 1% fee that they’re charging probably realistically reflects the cost that they have of customer acquisition, relationship management and also all of the personnel and systems that they’re using.
They might be able to reduce costs by leveraging technology for, say, the investment management piece of their business. Maybe they still charge something close to that but maybe the cost of the investment management piece is separate from the charges that they have for other types of advice and the customer acquisition and relationship management. See: Report from Dreamforce: Salesforce replaces old product with new one but the price may put the CRM software out of RIA reach for smaller firms.
When algorithms trump humans
SG: Is one of the challenges to your growth that people are hesitant to commit their investment assets to a non-human piece of technology?
JS: In our view it’s not necessarily one or the other. There are situations where human advisors can be quite helpful and there are situations where technology — algorithms may be a better way of saying it—are more effective that a human advisor would be. One of those areas is how you should invest and optimizing those investments. Where there’s no predictability, as there is in the case of the stock market, then algorithms tend to outperform human intuition and judgment.
And that’s not really a controversial position. We already trust technology for lots of things in our lives—recommending books and music or automating our homes—and the fact that technology can now be thoughtfully applied to investment management is sort of obvious and inevitable. And we seek to partner with advisors for those clients who have situations that are more complex. We’re happy to manage the investing piece and the advisor can manage other things such as wills and the trust and estate structure or other one-off private equity types of investments that their clients may be interested in. See: Marty Bicknell jumps into the mass market with no 'robo-advisors’ and a missionary zeal.
SG: How might the disruption Betterment helps bring to the industry play out for traditional advisors? Lower fees? More focus on non-investing, value-added services?
JS: The industry studies suggest that we’ve been seeing fee pressure for some time, particularly for those advisors who aren’t providing the value-added services that you mentioned.
I do think that we’ve provided an option that helps to make accessible this really efficient investment platform to more people. And we also want to make that accessible to the advisor community. I don’t think that’s going to displace them as much as be an advantage to them, at least to those who adopt it.
I would liken it to saying that technology is going to replace the doctor. No. Technology is not going to come in and replace everything that a radiologist does. But technology may be able to read a scan and detect a tumor just about as efficiently as a radiologist can. You still want a radiologist to come and do the check and have a relationship and operate the machinery. So the technology is inevitable and is a great thing and I think it works well with doctors in the case of medicine and advisors in the case of advice. See: Fidelity jumps into the game of providing technology for picking RIA technology.
Live partnerships TBA
SG: In terms of making your services available to the advisor community, how far have you gone down that road?
JS: We are piloting with some advisors now and we’re building some tools for them. I can’t reveal who, it’s too early to do that but some significant advisors are working with us.
SG: So are you live with any advisors?
JS: We have some partnerships that are live but I’d say more is in development.
SG: How many advisors are we talking about?
JS: I can’t give details on it yet. (The Betterment SEC ADV says that 500 people solicit clients on behalf of Betterment and the company has 40 employees, full- and part-time.)
'My grandparents use an advisor’
SG: Who would you recommend use the services of regular human advisors?
JS: I myself have used an advisor, my parents use an advisor, my grandparents use an advisor. A lot of people who have significant wealth have advisors and that’s a good thing for most people.
If you’re ready to entirely take things into your own hands or if you’ve never been able to afford an advisor in the past then something like Betterment is an ideal option for you. In my view, it’s by far the best way one could invest their assets. And we do things that many advisors don’t even do for their clients—certainly not at the $10,000 to $10 million level, the kind of tax efficiency and optimization that we do are rarely available. See: How Schwab’s new 'owning it’ advertisements position the firm to offer more advice — and how RIAs factored into the brand rethink.
But if you’ve got a really complex trust situations or generational wealth transfers or, say, a complex business structure as some people have, international tie-ups and so on, then an advisor who might bring to bear a tax expert in the office and other sorts of expertise could be well worth it.
'Everything better’ than Wealthfront
SG: Let me ask you about your competition, Wealthfront. Your counterpart at Wealthfront, CEO Andy Rachleff, has said that they’re growing faster than you.
JS: As far as I know we’re growing faster than them (laughs). (The SEC ADV of the companies show that Wealthfront has $427 million of AUM from 5,000 customers and Betterment has $303 million from 25,333 customers.) But I don’t pay a lot of attention. I think our goal is to be the best investment service for our customers—and we think our competition is folks like the discount brokers and the mutual funds and things like this. We just offer a better investment management solution than any of those platforms. And I wish a company like Wealthfront, that I think is doing some good things in this space, I wish them much success. I believe that we do just about everything better. See: Investing in the Digital Age: Why real-time data is a must-have for RIAs and long-term investors.
SG: A couple of Wealthfront selling points are tax-loss harvesting, asset location, and the direct access they offer to REITs and commodities, alternative asset classes like that. Is Wealthfront for more seasoned, sophisticated investors and Betterment for beginners and smaller accounts?
JS: That’s absolutely wrong. In fact, our platform is far more sophisticated. Our asset allocation is better because we don’t have commodities, which are a poor asset to have in there. Our algorithm is better, because it invests all of your money down to fractional shares, because the tax optimization is actually better. I don’t want to sort of pull it apart point by point but things like their tax-loss harvesting algorithm I think is a joke and not the way that it should be done. I would say that more people trust us with their money than any other online advisor by a long shot. See: Dimensional Fund Advisors still has low RIA acceptance rate and stunning growth.
(Brooke’s Note: Andy Rachleff declined to comment to these criticisms.)
$100 billion in five to seven
SG: What about the issue of asset location? It’s my understanding that if I have an IRA with you or a taxable account that I’ll get the same asset allocation.
JS: The differences are actually relatively minor. You can optimize around that. What we do is if you’ve got a taxable account, we’ll rebalance that very tax-efficiently for you; if you have a tax-advantaged account, we can rebalance that more frequently. So we do take account of the tax status of your account in how we manage them.
SG: Are you satisfied with the pace of your asset growth?
JS: We’re thrilled about the pace of our asset growth and growing five times in the last year. We see that continuing to accelerate and we’re just really pleased with the way that the product is evolving the team is growing and our customer base is growing.
SG: What’s your growth strategy going forward and what’s your asset target?
JS: Yeah, I think about us as managing $100 billion in five to seven years. And I think about how do we get there. We’re very ambitious in our growth targets and we’re growing through referrals, we’re growing through content and general awareness of our offering.
SG: What do you see as the main barriers to your growth?
JS: One challenge is probably trust and building trust with our customers and potential customers. As we’re around longer and as people better understand what we offer, that trust is built. As people get to know us and our brand that trust is built. But one of your questions was, is Betterment just for beginners. Clearly we haven’t done a good enough job of explaining the value of our very sophisticated algorithms and advice, and that’s something that we’re working on and investing in. See: A $2.5 billion RIA makes its mass-market bid for thousands of new clients.
SG: One of your big selling points is no minimum investment. Do you remain committed to that? Would you ever consider installing a floor for reasons of economics?
JS: One of our goals is to remain accessible to anyone who wants our advice. I’d just repeat that I think our platform is the best way to invest for anyone with $10,000 to $10 million. If you don’t have $10,000, it’s a fine place for you to get started and we want to make it accessible to you and that’s why we have the no minimum, it’s because we want there to be an option out there for those people. Because our cost structure and our efficiency are so great, we can make it accessible to those people. I don’t see us changing that; I see it as part of our core—although I do see our target customer as a much higher-balance customer.
SG: You’re a fast-growing young company. Have you reached profitability?
JS: We don’t talk about profitability. Sorry.