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Financial Planning > Tax Planning

Robo Pioneer Betterment Goes Upscale, Boosts Human Advice

By Jane Wollman Rusoff

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Traditional financial advisors have been worried that robo-advisors would make the full-service model obsolete. In the meantime, Betterment has slowly expanded from a pure robo to an online advisor with three different business lines: Retail-to-Consumer, Betterment for Advisors and Betterment for Business, Nick Holeman, CFP, Betterment’s financial planning expert, 27, tells ThinkAdvisor in an interview.

Now with $13.5 billion in assets under management, the firm claims to be the largest independent online financial advisor. Indeed, its high-net-worth offering, or Premium Plan, has been embraced by investors with accounts ranging from $100,000 to many millions, according to Holeman.

Such customers, potentially reaping the benefit of advanced strategies for investing and tax-saving, have unlimited access to human advisors: certified financial planners that Betterment hires and trains.

Last year, the company launched several different portfolio strategies for customization and flexibility. These include the BlackRock Target Income portfolio and Goldman Sachs Smart Beta portfolio.

Further, Betterment’s budding 401(k) division for small businesses has turned out to be fast-growing and with strong long-term prospects, Holeman says.

The advisor arm — Betterment for Advisors — aims to “empower” FAs by providing high-tech back-office capabilities to free advisors to spend more time interacting with clients and prospects.

Holeman, a CFP with fee-only Pure Financial Advisors in San Diego before joining Betterment’s investment team two years ago, works with product designers and engineers and gives wealthy customers one-on-one financial advice. He is also busy training the dozen CFPs – ages 20s-40s – that Betterment has hired to work with affluent clients. In the interview, he describes just what that entails.

Betterment, founded in 2008 as an automated digital-only advice platform, now has 340,000 customers, ranging from millennials to 85-year-olds, with an average age of 37 and an average balance just under $40,000.

Its website claims that Betterment’s “approach to long-term investing can help you earn 2.66% more than a typical investor” through its technology, which, the digital advisor says, makes possible lower taxes and fees, and permits “better investing behavior.”

ThinkAdvisor recently interviewed Holeman, speaking by phone from Betterment offices in New York City’s Flatiron District. An IRS enrolled agent — the designation qualifies him to give tax-related advice — the CFP also gives volunteer seminars at the New York Public Library through the Financial Planning Association’s New York chapter. He says that attendees are “definitely curious” about robo-advisors but that he isn’t there to sell them on Betterment, just to help with investing and financial planning education.

Here are excerpts from our conversation:

THINKADVISOR: Please explain how Betterment wants to “empower advisors.”

NICK HOLEMAN: What we really want to do for the traditional advising industry is empower advisors so they can spend more time with their clients, give better advice and take on more clients. We want to empower both investors and advisors [worldwide].

How do you help advisors now?

We have a network of traditional advisors who use all our tools and services as a resource; for instance, for automated rebalancing, automated tax-saving strategies, account opening and management or reinvesting dividends.

But the general perception is that Betterment is a robo-advisor for millennials.

We used to be strictly an automated service. But we are no longer. As our abilities continue to improve, we’ve slowly moved up the value chain, and now [in addition] we have multiple customers who have many millions of dollars on our platform.

How did you accomplish that?

As our products and services have evolved, we’ve begun to offer more advanced investment strategies, more advanced tax-planning and tax-saving strategies and better comprehensive retirement planning tools as well.

How have your fees changed?

Before, we didn’t have the ability to talk with a human advisor; now we have certified financial planners. There are two levels of pricing: the basic digital plan [no minimum account size], which is 0.25% per year and our Premium Plan [$100,000 account minimum] for 0.4% per year to talk with a certified financial planner on an unlimited basis.

What do your high-net-worth customers want most From Betterment?

First and foremost, they’re coming to us for unbiased [investing] advice and tax advice. They want someone they can trust. We don’t take commissions or sell our own investment products. Our high-net-worth customers tend to be higher income, so tax savings start to matter a lot more, and therefore a lot of our tax-saving strategies become more valuable.

Do these customers get tax-saving advice in a do-it-yourself format, or do they interface with a CFP?

We gather data when they sign up and use it to help estimate their tax bracket. Based on that, we can recommend, for instance, which would make more sense: a traditional 401(k) or a Roth 401(k). We do tax-loss harvesting, which is one of our automated features that the customer can just turn on — and we take care of the rest. So we provide personalized tax advice, but we do it in a scalable way that lets us reach thousands of customers.

Please discuss your 401(k) side.

It’s for small businesses to offer to their employees. It’s a newer part of Betterment and one of our faster growing ones.

So, do you plan to get more deeply into the 401(k) business?

Yes. Our 401(k) team has been growing, and this year we’ve been acquiring a bunch of new business through that side. It seems to be a very promising part of our future business.

How else has Betterment expanded?

In February 2017, we launched a number of different portfolio strategies. Before, we had only one main portfolio. I work with our product team to be certain that the descriptions of all the portfolios are very clear. For example, with the BlackRock Income Portfolio, we make sure that customers understand what an income portfolio is and the tradeoffs they can make when they choose it or a different one.

Why did Betterment decide to offer a selection of portfolios?

Customers said they wanted more choice and more flexibility. Offering new portfolios was our first way of satisfying the demand for different types of investment strategies. [To gather customer input], we have a team that specializes in user testing and research. We also ask customers to email, and we do beta testing and user research with focus groups.

You’re in charge of training the Betterment-employed advisors working with high-net-worth customers. What do you train them in?

Some of it’s technical, making sure they understand the more advanced tax or investing strategies that maybe they didn’t learn at their previous firms. There’s definitely a level of technical skill they need to have to be an advisor here.

What else is important in training them?

Listening and communication skills. A lot of what we do is very complicated.  Just because you’re a high-net-worth customer doesn’t mean you’re super-familiar with all the investment jargon that’s thrown around. So a lot of the training is making sure the advisors are able to have a conversation with a customer because they understand what they’re trying to do and can answer any question in a way that leaves them feeling knowledgeable and not like they don’t understand what Betterment is doing for them.

Why is that critical?

We’d rather have customers understand exactly what’s going on in their accounts so they can feel comfortable when the market gets a little choppy. That way, they’ll know that Betterment is taking care of them, that their plan is working appropriately — and that they have access to someone who’s looking out for them.

— Related on ThinkAdvisor:

Jane Wollman Rusoff

@jrusoff2

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