Is Betterment Advisors’ Friend or Foe?

CEO Jon Stein tells crowd at Inside ETFs that their business is complementary, but institutional players like Schwab should beware

Betterment CEO Jon Stein spoke to some 2,000 advisors and other financial professionals Tuesday morning at Inside ETFs 2015 in Hollywood, Florida, and immediately separated himself from the “average advisor.”

“This is early for me,” said the founder of the robo-advisor, who is in his 30s. “In our office, we get started at around 10 a.m.”

Next, he tried to warm the audience to Betterment. “There is a sense of competition between robo and human advisors,” said the New York-based entrepreneur. “I think that is a false competition.” 

Later in his talk, though, Stein made it clear that the firm is likely to put pressure on custodians and broker-dealers working with independent advisors, like TD Ameritrade and Schwab.

“By 2020, Betterment Institutional will be ‘the full-service hub’ for a new kind of advisor,” he explained. It plans bring on advisors who want automated tasks, like tax-loss harvesting and rebalancing in a paperless system, at a cost of roughly 25 basis points.

“The cost of trading has gone to zero, and the cost of diversification is essentially free,” he added.

This means, for advisors, that the business they need to build is “totally different than that of 10 to15 years ago,” Stein states. “Advice is more important than ever, both robo and human, but the tools are different. We are a great do-it-yourself option.”

Clients who bring assets to Betterment “are coming to us from self-directed [platforms] and almost never from advisors,” he explains.

While many advisors work with clients that have $2 million or more of assets to invest, “We see our core clients as one with a household at under $2 million,” the Betterment executive said.

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Betterment rolled out its platform for advisors a year ago.

“We combine recordkeeping and advice in one package, which has not been done before,” Stein said. “We are doubling every six months, in terms of assets, even through the [market] volatility.”

What separates Betterment from other robo firms, he adds, is that it “rebuilt the plumbing of financial services … by making it really convenient [for investors] to sign and making the investing experience different.”

Clients, he says, can quickly move money to Betterment from bank accounts rather than wait seven or more days for checks to clear or other processes to be completed.

“We’ve sped up the transaction process and made paperless rollovers possible,” Stein explained. “People are happier with the experience and give us more money!”

The group also has automated steps connected to behavioral finance' for instance, investors are warned about the tax consequences of panic selling.

When Betterment shares the tax impact in dollars, 62% of clients decide not to make the transactions, Stein says. Overall, close to 80% of transactions “are being prevented, which is remarkable,” Stein explained. “We use automation to help investors make better decisions.”

As for advisors, the platform — which includes ETF-based portfolios for clients to choose from after completing a questionnaire — frees their time up “so you can work more on financial planning, estate planning … and all the things we do not do,” he states.

“Independent advisors have to cobble systems together, which is so hard,” Stein said. “We package it all up, so it is a streamlined lower-cost solution. You just need an email and a Betterment account to open an RIA — and you should have a license, too.”

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