Betterment CEO Jon Stein sees robo-advice as remedying an “industry problem — the old way of managing money is broken.”
When investing for the future, he told me in a recent email, “People have been limited in their options. They could either do it themselves, or they could hand it off to an investment manager. The first is tedious, time-consuming and error-prone; the second has historically meant tolerating outdated technology and potential conflicts of interest.”
Stein co-founded Betterment and was named an industry frontrunner in the May issue of Investment Advisor. He says that “people’s money should work as hard for them as they worked to earn it, and that is the future of investing. The future of investing is more advised and more transparent, and automation helps make that all possible.”
Indeed, Stein says that capital will continue to flow into fintech, with assets under management by robo-advisors estimated to increase 68% annually to about $2.2 trillion in five years, according to a forecast from consultancy A.T. Kearney. “About half of that [AUM growth] is expected to come from money that’s already invested and the rest from non-invested assets,” Stein said.
As noted in the May IA profile of Stein, Betterment has accumulated more than $8 billion since it launched in 2010 and currently serves nearly 210,000 clients with its ETF-based portfolios; it rolled out a platform for advisors in 2014. Stein says he anticipates more consolidation in the fintech space “as incumbents look to more aggressively enter spaces where the new players are getting substantial traction.”
Here They Come
While no formal fintech/robo-advice regulations are in place yet, the Securities and Exchange Commission recently addressed the issue of portfolio risk in robo-advisors’ offerings and is boosting its oversight of such advice in its exams, according to “Looking Under the Hood: Robo Advice, Portfolio Risk, and Regulation,” a report released in mid-July by Celent, a fintech research and consulting group that is part of Oliver Wyman.
As Celent’s report notes, the SEC stated in guidance released in February that robo-advisors should be able to “make clear to clients” the following:
The frequency with (or situations in) which clients should update their profile information;
Risks around the ongoing maintenance of the portfolio inherent to the algorithm; and
Circumstances that would lead the robo-advisor to override the algorithm.
In June, the securities regulator announced an update to its annual exam process, “whereby robo-advisors would be subject to levels of review similar to those applied to real-life advisors,” the Celent report says.
The SEC highlighted compliance, marketing, data protection and the management of potential conflicts of interest as areas of focus. “In particular, the commission indicated it would scrutinize the way in which investment advice is generated, as well as the compliance processes in place for monitoring these recommendations,” Celent explained.
Similar concerns expressed by state regulators and the broker-dealer regulator, the Financial Industry Regulatory Authority, “suggest that supervision will only grow tighter,” Celent opines. SEC staff explained in their guidance that they have been monitoring and engaging with robo-advisors to evaluate how these advisors meet their obligations under the Investment Advisers Act of 1940.
While the SEC guidance focuses on robo-advisors that provide services “directly to clients over the internet,” the agency notes that it could also be helpful for other types of robo-advisors. Robo-advisors, like all registered investment advisors, “are subject to the substantive and fiduciary obligations of the Advisers Act,” the SEC says in its guidance. “Because robo-advisors rely on algorithms, provide advisory services over the internet, and may offer limited, if any, direct human interaction to their clients, their unique business models may raise certain considerations when seeking to comply with the Advisers Act.”