Uberization of Investment and Financial Planning

Betterment and other robo advisors are revolutionizing the investment and financial planning industry by providing automated wealth management services

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. [1] 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. [2]

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. [3] Additionally, Betterment does not have a minimum investment requirement; the average account balance is $29,000. [2] 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. [4] 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.

Next Steps…

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.” [1] 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. [1] 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. [1] 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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[1] Keith, Button, 2016. The Future of Investing. CFO, [Online]. NA, 10-12. Available at: http://content.ebscohost.com/ContentServer.asp?T=P&P=AN&K=117701686&S=R&D=bth&EbscoContent=dGJyMNLe80Sep7U4zOX0OLCmr06ep7FSsK%2B4S6%2BWxWXS&ContentCustomer=dGJyMPGuslGwqrFIuePfgeyx44Dt6fIA[Accessed 16 November 2016].

[2] Bloomberg. 2016. Robo-Adviser Betterment Hits the $5 Billion Mark. [ONLINE] Available at: http://www.bloomberg.com/news/articles/2016-07-14/robo-adviser-betterment-hits-the-5-billion-mark. [Accessed 16 November 2016].

[3] Pam, Walkley, 2016. Investing Robo Advice. Money, [Online]. September 2016, 70-73. Available at: http://content.ebscohost.com/ContentServer.asp?T=P&P=AN&K=117693540&S=R&D=bth&EbscoContent=dGJyMNLe80Sep7U4zOX0OLCmr06ep7FSsK%2B4SLeWxWXS&ContentCustomer=dGJyMPGuslGwqrFIuePfgeyx44Dt6fIA[Accessed 16 November 2016].

[4] Forbes. 2016. The Great FinTech Robo Advisor Race. [ONLINE] Available at: http://www.forbes.com/sites/falgunidesai/2016/07/31/the-great-fintech-robo-adviser-race/#2dfc1d63812d. [Accessed 16 November 2016].

Suleman, Din, 2016. Fiduciary Rule Dictates Automated Advice. Money Management Executive, [Online]. 24/41, 1,5. Available at: http://content.ebscohost.com/ContentServer.asp?T=P&P=AN&K=119315653&S=R&D=bth&EbscoContent=dGJyMNLe80Sep7U4zOX0OLCmr06ep7FSsaa4SLGWxWXS&ContentCustomer=dGJyMPGuslGwqrFIuePfgeyx44Dt6fIA[Accessed 16 November 2016].



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Student comments on Uberization of Investment and Financial Planning

  1. Betterment allows its users to invest in themes. For example, I can say, I think healthcare is going to be a growth engine in our country and I want to put a disproportionate amount of my assets there. It will do so (via an index of healthcare stocks). However, it doesn’t look at valuation at all. It can’t tell you – sure you think there will be growth there, but it is already priced in, and it probably isn’t a good buy.

  2. Betterment is an interesting name to watch in the robo advisory space, especially given the rise in popularity of passive investment management. Given the large troves of financial data that require some expertise to analyze and interpret, it is not surprising at all that the investment management space has been digitally disrupted to optimize investor returns given their preferences. That said, I question how Betterment’s “Nobel-prize winning research”-influenced algorithm is differentiated vs. other investment alternatives. You astutely pointed out that Vanguard and Charles Schwab are starting their own robo advisory practices, but it is also interesting that investment research firms such as Zacks Investment Management have also entered the space. Zacks’ Zacks Advantage Offering launched earlier this fall and appears to be going after a high net worth customer base, requiring accounts above $100,000 (http://www.financial-planning.com/news/zacks-investment-jumps-into-robo-adviser-race). While I agree with your suggestions of how Betterment can brave it on its own by supplementing its offerings and creating a stickier platform for its existing clients, I worry that Betterment has already shared its secret sauce to Fidelity, which was once a technology partner but recently launched its own product, Fidelity Go, to compete against Betterment and capture its share of the millennial and Gen X market (http://www.investopedia.com/articles/financial-advisor/051116/how-fidelity-go-roboadvisor-will-compare.asp).

  3. In my prior job (as a numbers monkey – I mean Associate***), we purchased a RIA business. RIA’s provide investment advice to clients, including asset allocation, estate and trust planning, and retirement coaching. Robo advisers were one of the potential threats we diligenced, diligently. We found that once families experienced a significant life event, first child, home purchase, etc., the need for an investment advisor arose. The advice you receive from your adviser is less about asset allocation and more about the wholistic approach to wealth management. We found that a shift to passive investing would only free up advisers to prospect and serve clients more often (or in the case of our company, golf during weekdays at the expense of financial performance). It will be interesting to see how robo-advisers play out over the next 10 years. I’m not sure they are complete disrupters to entrenched players or merely another tool in the adviser kit of tools.

  4. Interesting read. Having lived in San Francisco, Betterment and other robo-advisors were popular with people the tech space. The low amount of personalization seems to be the biggest limitation to me, more than an ‘advisor’ it seems to simply create a portfolio that its users can buy into, with only the ability to select the balance between stocks and bonds. I like your idea of having a consultation with a financial planner – combined with more flexibility in the contents of the portfolio, this could go a long way in meeting user’s specific needs rather than a blanket solution. However, too much financial planner time could make it harder for them to keep their fees low. Maybe there is a middle ground where more extensive data collection about the user’s situation, assets and goals can be fed into the system to generate a preliminary (and more customized) plan, which can then be reviewed and tweaked with more limited financial planner involvement?

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