Interview with Betterment

FSRankings had the chance to speak with Dan Egan, VP of Behavioral Finance and Investing (via email), and Joe Ziemer, VP of Communications and Business Development (via phone call) in an exclusive interview:

1) Betterment has done a particularly good job at appealing to older consumers too, and I believe roughly 1/3 of its users are over 50. Many other robo-advisors have struggled with this older demographic. What is Betterment doing differently?

Dan: 30% of our assets come from the 50+ segment, and 66% of our assets are not from millennials. When we first started Betterment, we were receiving a lot of our business from millennials due to the fact that we are an online service with no account minimum making it very easy to start investing. As we grew and evolved as a company and continue to add on sophisticated features such as Tax Loss Harvesting, Tax-Coordinated Portfolio (Asset Location), RetireGuide, and the ability to work individually with a CFP, we saw our average client qualities began to change as well. We often talk about what millennials want, but in reality, we think they want pretty much the same thing that everyone wants. They want a better user experience, they want transparency, they want to not have to worry about things like rebalancing, they want low fees and they want a financial services company that is aligned with its customers. That is what Betterment is.

2) Betterment has in the past said that “smart beta” is just “expensive beta”. Can you elaborate on that philosophy? Do you worry about missing out on the higher management fees associated with smart beta strategies?

Dan: Historically, smart beta funds have been significantly more expensive than their market-cap counterparts. This gives them a significant headwind to generating any outperformance. We believe investors should always discount uncertain benefits relative to certain costs, and so it’s questionable if expensive smart beta makes the customer better off.

Betterment is a fiduciary, and we’ve arranged our compensation model as such. We do not receive more revenue for recommending one strategy over another. We will not force more expensive smart beta funds on our customers to make more revenue.

3) Many retail investors are increasingly turning to hybrid robo-advisor models, and Betterment itself added human advisors this year. Should we have some doubts about the role of pure-play robo-advisors model going forward?

Dan: Until the algorithms are programming themselves, there’s no such thing as a ‘pure’ robo. Betterment has CFPs who guide our algorithms and advice, and speak with customers. By knowing our customers needs closely, we can more effectively decide what features and services would help most people, the fastest. We then apply technology to deliver and scale those services.

Human advisors always will be there to help clients, but the division of labor between them and digital advice systems will evolve over the years, with the digital advisory services picking up more and more capabilities.


4) After the Brexit vote, Betterment halted trades. At the time you said it was because the market was going to be volatile. The critiques centered around disclosure – that this kind of halt was not disclosed nor could it be reasonably expected. Does Betterment stand by that decision? Should customers expect Betterment to halt trading in the future if it feels its in the  best interest of customers? Has Betterment disclosed a policy on the subject?
Joe: Yes–this is part of our policy which is publicly available.  I’d also recommend you look at the response we put out (editor’s note: here) after it happened explaining our reasoning. We do reserve this right and ultimately our goal is always to act in the best interest of our clients.


5) Acorns has an incredible small AUM per customer, and the CEO recently said at the CBInsights conference that he wasn’t worried about customers accumulating so much wealth that they’d graduate to another, more full-featured wealth manager. Does that ultimately mean that Acorns isn’t really helping its consumers accumulate sufficient wealth for retirement?
Joe: I don’t think Acorns’ users are generally looking to save enough money for retirement. That’s not their goal. Rather, they’re only investing their spare change. They have their part of the market and we have ours–they’re don’t exist in the same space that Betterment does.


6) Would Betterment ever consider having Betterment’s customers own it, similar to the Vanguard structure?
Joe: That’s something that would be very hard to institute for a company such as Betterment where that sort of ownership structure hasn’t always been in place. However, our goal is to eventually become a public company, and we’ve been clear about that. We’ve had lots of customers reach out to us and tell us that they’d love to be shareholders in this company.


7) Betterment’s basic asset allocation is stock and bond oriented. Has Betterment considered further diversifying into other asset classes, like real estate and commodities?
Joe: We pride ourselves on the level of personalization we provide, but we think stocks and bonds pretty much have us covered for most of the market. When you look at something like real estate, that’s not an area we’re making an attempt to break into. With that said, we like to offer our customers many options for their portfolios and are always looking to improve on that.

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