Robo-Advisor Teardown: How Betterment And Wealthfront Stack Up

In the battle for assets under management (AUM), incumbent wealth management firms have faced significant pressure from insurgent robo-advisors, as investors have poured over $1.6B into robo-advisors across 151 investments since 2013.

The two largest of these robo-advisors, Betterment and Wealthfront, have collectively raised $405M in aggregate funding to date and have both voiced the long-term goal of going public. Nearly a decade after launch, Betterment and Wealthfront together manage approximately $15.9B of assets for over 495K client accounts.

While it’s clear that Betterment and Wealthfront have proven product-market fit, they’ve achieved this success by pursuing very different growth strategies.

Betterment has recently added new complementary services (including human advisors) and is focusing on attracting new retail and institutional accounts through their B2B channels, Betterment for Businesses and Betterment for Advisors.

In contrast, Wealthfront has continued to focus on product. Wealthfront’s consumer focus and new software offerings — including a fully-automated financial planning service called Path, and a portfolio line of credit that streamlines the traditional bank loan process — has helped them win a wealthier customer segment. However, Betterment’s B2B white label offering has helped them grow AUM and accounts under management quickly to surpass Wealthfront, which maintained an early lead through the end of 2014.

We used CB Insights’ data and form ADV filings with the SEC to analyze how the companies compare to one another across investor base, AUM and client accounts, and metrics such as hiring growth and web traffic. Some of the key takeaways from our analysis include:

• Betterment continues to outpace Wealthfront in client accounts. As of Q1’17, Betterment managed approximately 330K accounts, nearly 2X as many accounts as Wealthfront (at 165K accounts). Betterment’s growth can be partially explained by their B2B offering, which the SEC filing reported solicits customers from approximately 25,500 firms and persons and Betterment reports 400 advisory firms use the platform. B2B product is not a strategy Wealthfront is considering, according to Andy Rachleff, President & CEO of Wealthfront. 
• Wealthfront has a higher growth rate than Betterment. As of their respective filings in Q1’17 and Q2’17, Wealthfront had added 65K accounts, representing 65% growth, while Betterment added 52K accounts and grew 19%. At this pace, Wealthfront could surpass Betterment within three years. 
• Betterment has raised more than 2X the amount of funding as Wealthfront. Betterment has raised $275M total as of its latest investment (a $70M Series E – II round in Q3’17), while Wealthfront has raised $129.5M as of its last funding (a $64M Series D in Q3’14). Given its recent funding, it would be unsurprising to see Betterment make an acquisition, something Jon Stein, founder & CEO of Betterment, suggested the company was open to at CB Insights’ Future of Fintech conference.
• Betterment has taken the lead over Wealthfront for total AUM since 2015. The lead came after Betterment formally launched its white-label service Betterment Institutional (recently expanded as Betterment for Advisors and Betterment for Business) in Q3’14. Considering that Betterment has twice as much funding and nearly twice the number of client accounts as Wealthfront, it’s interesting that Betterment’s lead in AUM is narrower (approximately 33%). Further, Betterment’s new hybrid model with human advisors will increase its operating expense and targets a customer base where it has been traditionally weaker than Wealthfront: high net worth individuals.
• Wealthfront has consistently had a higher AUM per client. Wealthfront clients average $40.9K per account, compared to Betterment’s account average of $27.4K. Wealthfront also has a higher proportion of high net worth (HNI) customers, which account for 25 – 50% of Wealthfront’s AUM, vs. <25% for Betterment.
• Hiring data highlights channel focus for Betterment and a software focus for Wealthfront. Betterment’s job openings suggest it is more focused on business development and growing channels of engagement. Meanwhile, as Wealthfront goes full-stack, over half of all its openings are IT/software, engineering, and product development roles.

Table of Contents

• Client accounts
• Assets under management (AUM)
• Investment products and services
• Funding history
• Jobs and hiring
• Web traffic
• Social media traffic
• Looking Ahead

 

CLIENT ACCOUNTS: WEALTHFRONT COULD SURPASS BETTERMENT IN 3 YEARS

An analysis of the data shows that while Betterment leads Wealthfront in number of client accounts today, Wealthfront’s higher growth rate suggests that Wealthfront could surpass Betterment within 3 years. Wealthfront added 65K accounts in H1’17, representing 65% growth, while Betterment added 52K accounts and grew only 19% over the same period.

One explanation for Wealthfront’s growth is that it provides investors with more investment options than Betterment, such as 529 college saving services. Wealthfront is also adding a portfolio line of credit feature, which could help the company to win new customers. As of their latest filings in June 2017, Betterment continued to lead Wealthfront in client accounts, with 330K accounts vs. Wealthfront’s 165K. Betterment has consistently led since 2012, and today has nearly 2X as many client accounts as Wealthfront. Betterment’s growth can be partially explained by their expanded channel offering for institutional investors. Its B2B offerings (Betterment for Advisors and Betterment for Businesses) are reported to be solicited by approximately 25,500 firms and persons as reported in the company’s ADV. Betterment estimated in a press release in October that there are approximately 400 advisory firms using the Betterment platform.

Comparing average AUM per client, Wealthfront has consistently had a higher AUM per client ($40.9K invested per account, vs. Betterment’s average of $27.4K), and as it continues to add additional services like PATH and the portfolio line of credit, that average could grow over time.

In terms of customer growth rate, both Betterment and Wealthfront have grown client accounts every quarter since Q1’12. In Q2’17, Betterment’s accounts were up 80% compared to the same quarter last year, while Wealthfront grew accounts by 142% in the same time period. It was the second consecutive quarter that Wealthfront’s rate of growth outpaced Betterment’s. If this pace continues, Wealthfront could surpass Betterment within 3 years.

Neither are ceding ground easily, though, as both companies have been actively exploring new growth strategies in 2017. In January, Betterment launched a human advisory service to complement its robo services, and in addition it recently changed its price model.

While a host of people took to Twitter to complain about rate changes in Q1’17 (which resulted in a fee increase for Betterment Digital customers from .15% to .25%), the data shows Betterment added $1.6B in AUM and roughly 52K accounts from 1/31/17 – 6/1/17. For comparison, the company added 55K customer accounts from 1/12/2016 – 7/13/2016. In other words, the rate change did not end their account gains, although the growth rate did slow.

Over roughly the same period, Wealthfront launched new services, including the Path retirement planning product and a portfolio line of credit, and additionally added $1.76B in AUM and approximately 65K accounts from 1/26/2017 – 6/26/2017. This represented a 35% increase in AUM and 65% increase in accounts for Wealthfront since the beginning of 2017, while Betterment grew AUM by 23% and accounts by 19% in the same period.

 

 

ASSETS UNDER MANAGEMENT (AUM): BETTERMENT GROWTH SLOWS

While Wealthfront was first to market in the digital advisory space, Betterment today leads as the largest independent robo-advisor globally. But the two have seen a contrast in AUM growth in the most recent quarter.

Betterment grew AUM by approximately 13% since their last filing, their slowest quarter for growth. Again, this comes on the heels of the backlash against changes in Betterment’s fee structure in Q1’17. In contrast, Wealthfront set a new record for AUM growth in Q2’17, adding approximately $1.76B in AUM since the previous quarter. This was Wealthfront’s largest quarterly dollar increase in AUM.

As of their June 2017 filings, Betterment managed $9.06B, while Wealthfront managed $6.76B. Betterment surpassed Wealthfront for the first time in Q4’15, when it hit approximately $3B in AUM, compared to Wealthfront which reported $2.6B. Betterment has maintained its lead through Q2’17.

 

INVESTMENT PRODUCTS AND SERVICES

Both companies have been making headlines this year as they’ve rolled out new products, features, and services. In July alone, Betterment announced a fresh round of funding, in-app texting with advisors, and socially responsible investment options.

Meanwhile Wealthfront also added socially responsible investing to their portfolio mix, offered their new Advanced Indexing option, cut ties with their brokerage Apex Clearing, and stopped receiving Payment For Order Flow (PFOF), an added trading fee.

In January, Betterment surprised investors by announcing it was pivoting to a hybrid business model and changing its existing fee structure. Betterment’s new hybrid business model now includes access to human advisors and consists of 2 tiers of accounts with separate fee structures and account minimums: Betterment Digital, a fully-automated robo-advisor that can include limited access to professional advisory services from a pool of human advisors, and Betterment Premium, a hybrid model that provides investors with a dedicated financial advisor.

Betterment also offers two B2B offerings: Betterment for Advisors, for institutional investors and registered investment advisors, and Betterment for Businesses, for employers to offer retirement services and 401(k)s.

In comparison, Wealthfront is doubling down on software as it’s recently launched new products and expanded into personal banking (previously uncharted territory for robos). In Q1’17, Wealthfront rolled out an enhanced automated financial planning service called Path, which syncs investor’s savings, checking, and retirement accounts and makes recommendations based on investors’ current accounts, income and expenses, and desired retirement age.

Wealthfront also recently started offering qualified customers a portfolio line of credit, an automated loan service that offers lower interest rates and expedites traditional lending agents.

The chart below highlights where Betterment and Wealthfront align in terms of products and services and where the companies differ. Here we can see that Betterment has a more focused approach in the types of accounts it offers, whereas Wealthfront has a more dynamic portfolio offering that includes real estate, natural resources, and tech stocks. Wealthfront also offers more services for customers, including 529 college savings.

FUNDING HISTORY

Betterment has raised more than 2X the amount of funding as Wealthfront. Recently, Betterment kicked off Q3’17 with a $70M Series E tranche led by Kinnevik. In contrast, Wealthfront’s last funding round was a $64M Series D in Q4’14. Betterment’s new hybrid model is more capital-intensive than its previous model, and the funding may be used to increase headcount as the company looks to hire financial advisors. Wealthfront continues to maintain a leaner approach, and Wealthfront leaders have indicated they are not interested in a hybrid business model.

Betterment

New York-based Betterment was co-founded by CEO Jon Stein and Eli Broverman, who recently stepped down as president and COO to pursue an undisclosed opportunity (though he remains on the board). Stein built the platform while in business school and initially brought on Eli Broverman to be the company’s legal counsel. The bootstrapped company demoed the platform during the final round of the 2010 TechCrunch Disrupt startup competition and began to raise funding shortly afterward: its first round was a $3M Series A investment that included Anthemis Group, Bessemer Venture Partners, and Reinmkr Capital in Q4’10.

Betterment has raised 5 subsequent rounds of funding, totaling $275M. The company’s latest round of funding increased its valuation to $800M.

In terms of M&A, Betterment acquired ImpulseSave, a personal savings management application, in Q4’13 and has not made any other disclosed investments. However, at CB Insights’ Future of Fintech Conference in June, Jon Stein noted that Betterment is looking into buying related technologies in order to expand the platform’s functionality. By offering new business lines, the company could continue gaining market share and retain its current users.

Wealthfront

Wealthfront, formerly known as kaChing and based in Redwood City, California, was co-founded by Andy Rachleff, its current President & CEO, and Daniel Carroll, its Chief Strategy Officer. Prior to founding Wealthfront, Andy Rachleff was a co-founder and general partner of Benchmark Capital, as well as a general partner with Merrill, Pickard, Anderson & Eyre. Andy Rachleff briefly stepped down as CEO of Wealthfront in Q4’14, when he handed to reigns over to Adam Nash, the COO at the time.

Rachleff returned to Wealthfront two years later and resumed his role as CEO. Nash remained a member of Wealthfront’s board, and recently announced he was also joining the board of Acorns, another robo-advisor pursuing a very different strategy of automated micro investments.

Wealthfront first launched in 2009 as a mutual fund trading platform for amateur traders to search and copy top investor’s trading strategies. The company pivoted in Q4’10 to make the platform a personalized recommendation engine rather than a searching tool. Wealthfront has continued to invest in technology and has expanded its platform to include the suite of retirement and wealth management services highlighted above.

Wealthfront raised a $3M seed investment in Q4’08, from a number of prominent founders and angel investors, including Marc Andreessen and Ben Horowitz (co-founders of Andreessen Horowitz), Bruce Dunlevie co-founder of Benchmark, and others.

Wealthfront has raised 4 subsequent rounds of funding, totaling $129.5M. The company’s latest round, in Q4’14, was a $64M Series E investment that included participation from DAG Ventures, Greylock Partners, Social Capital, Spark Capital, and others. The investment valued the company at $700M.

We used CB Insights’ Business Social Graph below to visualize how the investors in Betterment and Wealthfront are interrelated.

Wealthfront has raised investments from DAG Ventures, Dragoneer Investment Group, Red Swan Ventures, Ribbit Capital, and others. Its most active recurring investors are DAG Ventures, Greylock Partners, Index Ventures, and Social Capital, which have each participated in 3 Wealthfront investment rounds.

Betterment’s investors include Anthemis Group, Bessemer Venture Partners, Citi Ventures, Kinnevik, Menlo Ventures, Red Swan Ventures and others. Bessemer has been the company’s most active investor, participating in all six rounds of funding.

Red Swan Ventures is the only investor in both companies, participating in Betterment’s $10M Series B in Q4’12 and Wealthfront’s $20M Series B in Q1’13. Andy Dunn, the co-founder of Red Swan, also participated as an angel investor in Wealthfront.

 

JOBS AND HIRING: CHANNEL VS. PRODUCT FOCUS

As of June 2017, Betterment had 219 reported employees and Wealthfront had 130 employees. Using the CB Insights jobs estimate tool, which collects openings from various job marketplaces, we’ve seen that both companies have been actively hiring over the last year. Digging more deeply into the specifics of posted roles gives some insight into what these companies are working on.

Betterment’s job postings run the gamut of both technical and non-technical jobs. Currently open roles include positions within software engineering, product development, marketing, analytics, administrative, and product, and are in the entry-level and middle management levels.

Betterment has also been hiring for newer roles, including positions for experienced industry advisors to support the company’s hybrid business model. These types of openings at Betterment suggest it has been focused on business development and growing channels of engagement.

Wealthfront’s job postings have been more narrowly focused, with posted positions consistently falling under technical functions, suggesting a product focus. As Wealthfront continues to launch new software features, it’s unsurprising that it continues to recruit heavily for technical talent. Current roles are mostly for IT/engineering and product roles, but also include communications and marketing. Openings are mostly senior-level positions, thought there are a few entry-level roles as well. Notably, Wealthfront recently hired a VP of marketing to build out their growth strategy.

 

WEB TRAFFIC

After seeing traffic decline precipitously last October, both Betterment and Wealthfront have seen their traffic grow since the election and into early 2017. Regulation impacting the wealth management industry has been a trending topic in the media, as regulations such as the Department of Labor’s Fiduciary Rule have been a much-discussed point of contention between incumbents and regulators.

Another potential explanation for the uptick in web traffic is that both companies have been releasing new features and making changes to their management teams, and moreover the two are often benchmarked to each other in media coverage.

Web traffic is an important metric, as both Betterment and Wealthfront are branchless, and retail investors open accounts online or through the app. The narrow gap in traffic suggests retail investors are increasingly looking at both websites and the choice between the two is getting tougher.

 

SOCIAL MEDIA TRAFFIC

Twitter mentions of Betterment spiked after the launch of its new tiered account model as customers took to the platform to voice frustrations over the management fee hike on premium accounts (mentions of Wealthfront also jumped at the time). However, a look at the data shows that mentions to both have since decreased. Wealthfront’s peak social traffic occurred around the time the company closed its latest Series D investment.

This is particularly relevant as Betterment and Wealthfront have both recently invested in a new brand strategy and are actively hiring for growth roles like marketing positions. Both are leveraging social media to roll out their new marketing campaigns and engage directly with their target demographic of millennials. The correlation suggests that negative sentiment about one is driving traffic to the other, and paired with the web traffic metrics, shows customers tend to compare the two directly when shopping for a robo-advisor rather than finding their way to just one service.

LOOKING AHEAD

Betterment has so far managed to surpass Wealthfront in key metrics such as AUM and client accounts, though it has had to raise 2X the amount of funding in order to pull ahead. The company also requires a high cost base to support functions like its B2B channels and the human capital required to support its new advisory B2C model.

Meanwhile, Wealthfront is growing more quickly, and so far winning a more attractive part of the market: higher end, wealthier clients, who are inherently less prone to churn and thus a more efficient customer to acquire.

Given recent news and the data highlighted above, here are a few things to watch out for from Betterment and Wealthfront moving ahead:

Will Betterment pursue more M&A? — Betterment recently raised $70M more in funding, and the possibility of an acquisition has been alluded to by Jon Stein. A significant acquisition could change the dynamics quickly in this still-maturing market. For perspective, robos manage <1% of total AUM in the US, and though industry forecasts are bullish on robos, by 2020 it is projected that they will still only manage $2.2T of $101.7T (or about 2% of AUM).

Could Wealthfront surpass Betterment in accounts? — If growth rates persist, this could be a big shift. One big question for Betterment is whether pivoting to a hybrid model and adding features such as in-app texting will spark a new channel for growth, or be features that don’t offer enough differentiation.

Robo-IPO? — Betterment and Wealthfront both have high valuations ($800M and $700M respectively), have raised significant funding, and are demonstrating significant momentum based on mosaic scores. Additionally, both have maintained a focus on growth and building out new features and services. The CEOS of both companies have voiced aspirations to make an IPO, but have not yet taken any public steps to file.

 

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