Robo adviser battles inertia to attract rich investors

Jonathan Stein believes Betterment can compete on its nimble technology

Betterment has made a name for itself among US retail investors, having grown from a start-up in 2010 to a robo adviser with $4.5bn in assets and 160,000 clients in May.

With 191 per cent growth in assets throughout 2015, Betterment is the fastest-growing business in this year’s FT 300 list of registered investment advisers. Only three other RIAs — Summit Financial Wealth Advisors, Catalyst Capital Advisors and Feltz Wealthplan — increased their client assets by triple digits last year.

Betterment’s main pitch is that it invests clients’ money in a globally diversified portfolio of exchange traded funds and gives them personal, automated advice at a fraction of the cost of traditional financial providers. The company’s fees range from 15 to 35 basis points annually, depending on the amount in clients’ accounts. Investors with accounts below $10,000 are required to increase their investment by $100 a month to qualify for the annual 35 bps fee. Otherwise clients pay $3 a month. This compares with charges of between 75 bps and 100 bps for the average financial adviser depending on assets, according to SEI Advisor Network, a wealth management service provider.

More than three quarters of Betterment’s client assets come from people with less than $1m to invest, while about 18 per cent come from those with $1m to $10m. Just 2 per cent of assets come from clients with more than $10m to invest.

Betterment’s founder and chief executive, New York-based Jonathan Stein, expects the company’s future growth to come largely from the ultra-rich, especially from those aged over 50, whose accounts represent 30 per cent of the platform’s assets, and to some degree the high earners in the 35-50 age group.

“We’ve seen over the last two years an amazing amount of growth from wealthier customers, who are giving us a higher share of their wallets,” Mr Stein says. Its average account was worth $27,000 at the end of 2015, while clients over 50 have average accounts worth about $67,000.

Betterment was initially seen as a robo adviser for young or new investors, but in the past two years more experienced and richer investors have taken to it, Mr Stein says.

Wealthier clients’ favourite features include its online tax services, such as the ability to assist with tax advice. “We tailor their account to their specific situation and manage it to reduce their overall tax burden,” Mr Stein says.

Customers can manage their own investments or their financial advisers can use the tools of Betterment Institutional, launched for advisers in 2015. Mr Stein says Betterment is in the early stages of building client management teams to help external advisers use the tools on the platform. “It’s never been about humans versus technology. It’s always been about the best of both,” he adds.

Overcoming the “barrier of inertia” is Betterment’s greatest challenge when trying to attract richer clients. The wealthy tend to prefer to keep their money with companies they already use, in part because of the “hassle of changing providers”, Mr Stein says. “But what they don’t realise is that resisting change may just be like throwing hundred dollar bills out the window,” Mr Stein says.

He adds that the company needs to make the benefits of a potential move to the platform more tangible for this particular group. Betterment’s “real competition” is coming from big-brand companies such as Vanguard, Charles Schwab and Fidelity, Mr Stein believes. All three have developed robo-adviser units.

Vanguard’s Personal Advisor Services had about $12bn in client assets at the end of 2015, while Charles Schwab’s Intelligent Portfolios robo had about $5.3bn. Fidelity is due to roll out its Go service this year.

Betterment partly plans to compete with these large, well-established fund companies through its technology. “One of the advantages we have is we don’t have the legacy technology systems and processes that some of the incumbents do,” Mr Stein says. “We built everything from scratch, and we don’t have that baggage, so we were able to build tools to service customers more efficiently.”

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