Digital advisors commonly referred to as robo advisors are revolutionizing financial and investment planning by providing automated, algorithm based portfolio management services without the help of human financial planners.  Although robo advisors are a small segment as compared to traditional human financial advisory services, the automated investing business is growing rapidly. According to a study published by A.T. Kearney in 2015, robo advisors will manage $2.2 trillion in assets by 2020, representing a 5% increase of total assets invested in robo advisors from 2016. 
Betterment’s Business and Operating Model
Betterment, regarded as the pioneer of automated investing, is the largest stand-alone robo advisor with $5 billion in assets under management. Betterment provides automation in portfolio planning, asset allocation, risk assessments, account re-balancing, as well as other digital tools. Betterment asks investors a series of automated questions about their financial goals, risk tolerance and investment horizon and then chooses appropriate investments for the investor’s portfolio by using algorithms. The digital platform makes investing easily accessible using computers, tablets and smartphones. It is particularly appealing to millennials who are generally not interested in financial planning and who may not otherwise have access to investment advice.  Additionally, Betterment does not have a minimum investment requirement; the average account balance is $29,000.  They also charge much lower fees relative to human advisors. Average fee range from 15-35 basis points (BPS) whereas human wealth managers charge 100- 200 BPS.  In addition to lower fees, Betterment provides a seamless user experience that’s easy to use and simplifies the investing process that can be confusing and hard to follow.
Betterment must address potential regulatory hurdles around robo advisors. As registered investment advisors, robo advisors are required to act as fiduciaries on behalf of their customers and must put the customers’ needs before their own. Regulators have voiced concerns about whether robo advisors can act as fiduciaries. The Massachusetts Security Division recently raised this issue with investors and stated that “it did not believe an algorithm alone was capable of serving as a fiduciary, at least not the way robo advisors are structured now.”  They are not exhaustive enough when getting information about investors which informs the robo advisor’s decision about how to allocate a customer’s portfolio. As an example, robo advisors do not ask about money held outside of their portfolios, providing an incomplete picture of an investor’s financial circumstances.  Human financial advisors, on the other hand, can help clients talk through their life goals and risk appetite in greater detail and with more sophistication than the automated questions that robo advisors ask. Betterment can address this concern by offering its clients human touch points via face to face, phone call, or email with financial planners. For example, for first time investors or investors with more complicated financial circumstances, Betterment should provide its investors a consultation with a financial planner to make sure that the financial needs of the investor are fully understood. Following the first point of contact, the portfolio can be adjusted automatically with human interaction only when the investor’s goals or risk appetite changes.
Another concern is that investment performance will be a much less differentiating factor among robo advisors because of their use of low-cost passive investments that generate similar returns.  This will become an even greater problem as more competitors enter automated investing business, especially large wealth management firms such as Vanguard and Charles Schwab. Betterment should differentiate itself from its competitors by focusing on user experience by creating the most seamless digital platform and the highest quality customer service. It should also spend more on advertising and marketing to acquire more customers who would otherwise chose a more established wealth management firm.
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