Robo-advisors are on the rise and financial advisors would benefit from making them their friend rather than their enemy, one of the kingpins of the digital investing movement told attendees at the Inside ETFs conference in Hollywood, Fla. on Tuesday.
“There is a sense of competition between robo-advisors and human advisors, and it’s a false competition,” said Jon Stein, founder and CEO of New York-based Betterment LLC, the biggest and fastest growing robo-advisor firm in the U.S., with assets under management (AUM) of US$3 billion.
Betterment has developed a division called Betterment Institutional that partners with independent financial advisors to help them provide their clients with online services, such as customer analysis, portfolio building tools and automatic rebalancing, while freeing the advisor to concentrate on the more complex aspects of wealth management and tax planning.
Betterment’s investment portfolios consist entirely of low-cost exchange-traded funds that the firm has selected and assembled into customized portfolios to suit client objectives and provide appropriate asset allocation.
“You can combine better technology with the advisor’s personal touch,” Stein said. “The advisor can access all our services and products, customize everything for the client and then personally add on the extras such as tax and estate planning. We provide a white label experience, for which statements and other communications can be branded with the advisor’s own name and firm.”
By providing a wide array of services, including back office, custodial, performance reporting and secure co-browsing of accounts between advisors and their clients, advisors’ time is freed up to give the personal touch to existing clients and recruit new ones, Stein said.
“Managing accounts becomes less time intensive and you can take on more clients,” he said. “The additional automation can allow you to scale your practice, with less time spent executing trades and doing paperwork. Betterment Institutional is a great service for new advisors, it’s like training wheels.”
The cost of advisors partnering with Betterment Institutional is roughly 25 basis points on the value of their AUM, but this can be negotiated for large accounts. This is roughly the same cost that retail clients pay.
Advisors can then add their own fees for advice on top and Betterment can arrange to have these additional advisor fees incorporated into the client statements and the reporting of returns to clients.
The robo-advisor movement is growing rapidly, Stein said, and Betterment has been doubling its AUM every six months, with the pace accelerating even in recent volatile markets. In fact, he said January has been Betterment’s best month ever for attracting new AUM, despite the fact that it has been the worst January in 80 years for the U. S. stock market.
Stein agreed with forecasts by Citibank that robo-advisors will control assets of US$5 trillion within a decade: “With the help of technology, we have rebuilt the plumbing for financial services, making it easy to sign up and access those services. It has transformed the customer experience for the better.”
Stein sees a huge opportunity in addressing the needs of the mass market, which does not have the means to access sophisticated advice. His target market is retail investment households with less than US$2 million in assets. Many clients have come over from the self-directed or “no advice” side of the business, he said.
“Clients today can trade for free, and a diversified investment portfolio can be obtained for almost no fees,” Stein said. “However, advice is more important than ever, whether it’s human advice or advice through technology. About 80% of our clients say they want advice on investing and retirement.”
Betterment is not seeking clients with complex holdings in real estate or international assets, he said, but those between 36 and 55 years of age who are building a career and family.
“We’re seeing some clients with assets up to US$10 million,” he said. “They’re being offloaded by other firms. A clients with more than $10 million can have a cheque delivered to their kids at college by helicopter, and on a silver platter, but with less than $10 million may not be well served.”
Betterment uses customer account analytics to offer some unique and unusual services. For example, if a customer wants to sell some holdings, he or she is immediately sent information on the tax consequences before the trade is executed. The client therefore thinks twice, Stein said, and in 62% of these cases doesn’t follow through with the transaction. In January, Betterment stopped 79% of sell transactions as clients reacted hastily to volatility.
“The service saves taxes for the client, prevents attempts at market timing, and results in better long-term performance,” he said.
If a client ultimately decides to sell, Betterment has a “tax-loss harvesting” system that finds embedded capital losses in the client’s account that can be used to offset any capital gains and thereby enhance after-tax returns. The firm also offers a “smart deposit” program that automatically invests dividends or any excess cash sitting in the account above a threshold specified by the client.
See also: How robo-advisors can help your practice