Digital revolution has only just begun believes Betterment

Robo-advisers have exploded onto the wealth management scene in recent years, but remain in their infancy, believes Jon Stein, founder and CEO of Betterment, one of the largest players in this arena. 

“I think there has been a general lack of imagination about how far technology can go to deliver better financial advice,” he explains. He points to the early days of Amazon, when it offered access to a relatively limited range of bestselling books, and compares that to the giant it has evolved into. “These are very early days for automated investing and there will be a lot more to see as these platforms evolve.” 

Mr Stein found himself working on Wall Street after graduating and it was then that he came up with the idea for Betterment. “It was through seeing bad practices in the financial industry and through my own struggles using the tools that existed that I thought there really ought to be a better way. There should be a more obvious answer to ‘What should I do with my money’.”

The end of defined benefit pension schemes left investors with a feeling of uncertainty, he believes, and this is where robo-advisers can fill a gap. “You have got to have at least $1m to get good advice in the US and sometimes they don’t really want to talk to you unless you have $10m. But that leaves this vast market of people who don’t have enough advice.”

Betterment offers clients a goal-based approach – most of its customers have several targeted accounts, be it a retirement fund or deposit for a house, with specific investment portfolios for each – and are given integrated advice which is updated in real time.  “Our customers rate immediacy as one of the most important things to them,” claims Mr Stein. 

“Our average customer is about 36 years old with over $100k income with $250k net worth. These are young professionals who expect Amazon Prime to deliver them something the same day.” 

This goes hand in hand with the prevalence of smartphones and tablets – two years ago 20 per cent of Betterment’s log-ins were mobile, today it is more than 60 per cent.

Betterment, which launched in 2010 and now has $2.6bn under management and more than 100,000 clients, is focused solely on the US market and Mr Stein, speaking at a conference in Amsterdam, is quick to point out that it has no aspirations on this side of the pond. “It would be very difficult to export this business to Europe or anywhere else because we are very much set up for how things work in the US.”

A number of trends are driving the rise of automated investing in the US, believes Mr Stein. Falling transaction costs have made trading very different, as has the reduced cost of diversification. “It used to be really expensive to go out and buy a globally diversified portfolio, but thanks to ETFs, you can now do that for less than 50 basis points,” he says. “It is no longer an advantage to be both the manufacturer of those assets as well as the adviser. It is better to be independent and select from what is out there.”

The rise of robo-advisers is yet another challenge for active managers to contend with following the explosion in the use of ETFs in recent years.  But can a purely passive approach deliver the returns clients expect? 

“There is so much evidence to suggest that passive strategies perform, net of fees, at least as well as active strategies,” says Mr Stein. “That is not to say that a great active manager can’t go out and beat the market, but you need to have an information advantage. And most don’t have that.”

Betterment offers access to a global range of equities and fixed income, and although Mr Stein finds private equity interesting, he has less time for real estate and  commodities.

In 2014, the online firm launched Betterment Institutional which aims to automate the operational side of adviser’s businesses, allowing them to focus on their clients. “This is still a very tiny part of our business, but it is growing fast,” he says.

Competition is certainly heating up in the robo-adviser arena. In addition to competitors such as Wealthfront, more traditional names are entering the fray. BlackRock, the world’s largest fund manager, recently bought San Francisco-based FutureAdvisor, while tech giants such as Google are often linked with moves into the financial services industry. There is room for a handful of new companies, believes Mr Stein, though he expects some consolidation. 

“I always new that these big companies would come after this sector,” says Mr Stein. “If we were successful, everyone would want to be in this business. If they didn’t, we have failed. Of course they have to get involved, it is the future of investing.”